GitLab (Nasdaq: GTLB) released a generally solid second-quarter 2024 earnings report.This report has some flaws, for example in the earnings preview analysis I wrote a few days before this earnings release As a result I stated that I believe GitLab will raise its revenue target to around $565 million.
Yes, GitLab did revise its revenue target upwards, but GitLab’s upwardly revised figure was only $557 million in revenue. There’s one nasty detail that overshadows the GitLab story. It’s difficult to know at what level its revenue growth rate will plateau, and we’ll discuss that in more detail shortly.
That being said, I think paying GitLab roughly 14 times this year’s revenue takes that into account.
So, that’s why I’m bullish on GitLab.
GitLab’s near-term outlook
GitLab is a virtual toolbox for software development teams to help them collaborate more effectively. It simplifies tasks such as managing code, tracking changes, and automating the process of turning code into working software. In essence, it is a one-stop shop that simplifies the entire software development process, enabling smoother teamwork and faster software delivery.
In my previous analysis, I thought GitLab would use the earnings call to discuss its AI innovations. While that did come up, it didn’t deliver mostly prepared remarks. Instead, GitLab emphasized that its mission focuses on security and delivering software faster, here is a quote from the earnings call:
Using GitLab, the Navy Black Pearls team designed and created a custom operating software environment in days rather than months. Many of our clients have complex security compliance and regulatory requirements.We meet these needs with GitLab Dedicated
GitLab goes on to discuss how it benefits from customers’ desire for vendor integration, and how GitLab is taking market share from some of its peers in the software development and collaboration space, in this case Atlassian (TEAM), see below.
GitLab integrates all aspects of software development into one platform. Customers can increase productivity and efficiency throughout the life cycle. This includes enterprise agile planning and value stream management. During the second quarter, we expanded our engagement with a multinational financial services company. The client wanted to increase efficiency by integrating the enterprise agile planning solution with other software development practices. They migrated thousands of business users from Jira to GitLab.
When earnings calls eventually inevitably turn to AI, it’s more about the prospect of AI not getting in the way of building and releasing code by violating intellectual property.
Also, during the Q&A portion of the call, there was discussion of how coding is only a small part of a developer’s job (roughly a fraction of a developer’s time), and how GitLab is finally using AI for the application “lifecycle” The theme of the function. What DevOps does.
All in all, GitLab’s message is an acknowledgment that AI could eventually become a significant part of GitLab’s business, but for now, GitLab has more pressing prospects to pursue. With this framework in mind, let’s discuss GitLab’s financials.
Revenue growth rates are impressive, but
There’s no doubt that GitLab is slowing its revenue growth rate. This means that despite GitLab’s revenue growth of nearly 8%, the above chart still masks its long-term narrative.
In other words, while investors were happy to see GitLab beat consensus estimates, the fact remains that GitLab’s revenue growth rate is slowing.
Naturally, disturbingly, this raises an important but unavoidable question. At what rate will GitLab eventually stabilize its growth rate?In fact, the decline from Q4 of FY2023 (when GitLab was growing at a CAGR of 58%) to Q1 of FY2024 (when GitLab was growing at a CAGR of 45%) was quite important.
And then the decline from the first fiscal quarter of 2024 to the second fiscal quarter of 2024 is also very large.And then looking ahead to the fiscal third quarter, even if we assume a conservative revenue growth rate of around 8% for GitLab, that still implies a CAGR of 33% in the fiscal third quarter of 2024, which would be further down.
So, with that background in mind, I’ll ask another question: where is GitLab’s growth rate stabilizing? Is this question that important at this stage?
Profitability will improve
GitLab’s cash flow improved dramatically, from negative $36 million in last year’s fiscal second quarter to positive $27 million in the most recent quarter.
What’s more, looking ahead to next year, GitLab reiterated that it will deliver breakeven free cash flow.
As such, we once again remind GitLab of its determination to grow profitably. So the only question we have to really determine is, what kind of growth rate makes sense? Has this uncertainty been absorbed?
GitLab is priced at about 14 times this year’s sales. It’s not the cheapest stock. But it’s also far from the most expensive. This is a mid-range product. That’s slightly more expensive than Atlassian, but Atlassian’s revenue growth rates are nowhere near those levels.
the bottom line
I have a small question about GitLab’s recently released Q2 2024 earnings report. While there were positives, such as an upward revision to the revenue target, it fell short of my initial expectations. Given the recent decline, the question of where GitLab’s revenue growth rate will stabilize is a concern.
However, despite these uncertainties, I tend to be bullish on GitLab. Its role as a simplified software development toolbox and its focus on security and market integration are promising signs. The company’s improved cash flow and determination to deliver profitable growth lead me to believe that GitLab’s current valuation (roughly 14 times this year’s sales) is justified.
So, despite the uncertainty, we have good reason to be confident about GitLab’s prospects.