GitLab’s stock price has taken a beating over the past six months, shedding 34.6% of its value and falling to $44.08 per share. This may have investors wondering how to approach the situation.
Following the pullback, is now the time to buy GTLB? Find out in our full research report, it’s free.
Why Are We Positive On GitLab?
With its all-remote workforce pioneering a new approach to software development, GitLab (NASDAQ: GTLB) provides a single-application DevSecOps platform that helps development, operations, and security teams collaborate to build, secure, and deploy software faster.
1. ARR Surges as Recurring Revenue Flows In
While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.
GitLab’s ARR punched in at $777.9 million in Q1, and over the last four quarters, its year-on-year growth averaged 31.7%. This performance was fantastic and shows that customers are willing to take multi-year bets on the company’s technology. Its growth also makes GitLab a more predictable business, a tailwind for its valuation as investors typically prefer businesses with recurring revenue. 
2. Elite Gross Margin Powers Best-In-Class Business Model
Software is eating the world. It’s one of our favorite business models because once you develop the product, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.
GitLab’s gross margin is one of the best in the software sector, an output of its asset-lite business model and strong pricing power. It also enables the company to fund large investments in new products and sales during periods of rapid growth to achieve outsized profits at scale. As you can see below, it averaged an elite 88.6% gross margin over the last year. Said differently, roughly $88.64 was left to spend on selling, marketing, and R&D for every $100 in revenue. 
3. Operating Margin Rising, Profits Up
Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.
Over the last year, GitLab’s expanding sales gave it operating leverage as its margin rose by 14.5 percentage points. Although its operating margin for the trailing 12 months was negative 14.9%, we’re confident it can one day reach sustainable profitability.
Final Judgment
These are just a few reasons why GitLab ranks highly on our list. After the recent drawdown, the stock trades at 7.4× forward price-to-sales (or $44.08 per share). Is now the time to initiate a position? See for yourself in our in-depth research report, it’s free.
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