This is going to be short, but Gitlab is a platform for DevOps developers. Honestly if you want more service on their specific offerings which I already have looked into and don’t feel like listing, just look on their site but their goal is to help software developers from planning to implementing software. Their main competitors that offer aid in all steps are GitHub (bought by Microsoft), Jira from Atlassian, and Red Hat (bought by IBM). Though there are many more players in each steps where they are specialized, these 4 players are the main ones that cover all of the steps in software development aid.
Over the past months, we have seen software companies with growth rates of 50%+ during the pandemic fall from their heights, but GTLB, which IPO’d at a price of 100 and reached a height of 130 before falling, is still at around 55. Though this is still a large drop, many other overpriced software companies have dropped significantly more. But besides peers, it is more important to look at historical valuation multiples. Gitlab is currently trading at 19.4x P/S ratio or a 17.2 EV/S ratio. Though the company is poised to grow roughly 60% in 2022 and 40%-50% in the years onward, it is still overpriced considering its negative income and cash flow.
They currently have an operating margin of -50% and even when excluding unusual items, the adjusted operating/Cash margin is roughly -25% and over the past 5 quarters, the operating margin has been constant showing no sign of improving margins in the near to mid future.
That was a lot of numbers so let me frame it in perspective, this business is growing at 50% at a near 20 P/S. Even if it was at max FCF margins of roughly 25-30% it would still be trading at around 75 times FCF. Though of course this high multiple has the exception due to 50%+ growth, Tesla is poised to grow at 50% over the next few years from guidance and estimates yet it is…coincidentally trading at 75 FCF. Yes I know the automobile industry is vastly different and arguably more cyclical than the software business along with other downsides such as higher CapEx, but if a company with only 400 million in revenue and negative cash flow is being price similarly to an over 600 billion dollar company’s with soon close to $100 billion in revenues and actual cash flow, I would much rather buy the latter anyway of the week.
Besides Tesla as an example, TEAM (Atlassian) is trading at almost 65x 2022 FCF yet it is still growing 30% and its margins will continue to improve unlike GTLB’s.
To put it simply, why should one pay 75 times “imaginary” cash flow just because a business is growing 50% yearly.
Along with this, though the DevOps software market is large and growing fast at around 15% – 20% CAGR and more enterprises are adopting and integration better software, Gitlab has been used more by smaller teams which is why their Unit economics suck. They are neck and neck with Jira, GitHub, and Red-hat for the lucrative enterprise software deals. They have no competitive advantage and I believe they will soon lag behind their competitors in securing enterprise deals due to Microsofts, Atlassian, and IBM’s already well-established software’s integration making them much more favorable for enterprises.
I still have not done enough Due Diligence to feel comfortable in terms of understanding the market perfectly though I am mainly doing those for feedback.
Leave a Reply