GitLab Stock: An Overvalued DevOps Pure Play

There’s a general understanding that a company’s brand contributes to the success of an initial public offering (IPO) and afterwards by providing a population of people who invest in the stock because they believe in the brand. That’s according to a leading marketing research firm which says strong brands result in “consistently higher share prices and are less affected by stock market turbulence.” One might argue that the customer profile matters as well.

A paycheck advance company is probably not going to benefit the same as a healthcare services company when it comes to the type of investor they attract. People who get advances on their paychecks are likely to invest with a very short time horizon, while those who work in healthcare might have more discretionary income to invest. Perhaps the best population for a company to have would-be customers who are heavy users of the product – fans who act as a community – and all enjoy six-figure incomes. That’s why when GitLab’s IPO debuted, we figured plenty of programmers out there would be keen to get a piece of it.

About GitLab Stock

Click for company website

GitLab Inc (GTLB) isn’t any ordinary company, it’s the largest remotely controlled firm in the world, (at least it was before The Rona came knocking). When a CEO’s letter to shareholders starts off as follows, you know you’re stepping into an interesting firm:

GitLab did not start in a tech incubator, garage, or Bay Area apartment. In 2011, my co-founder, Dmitriy Zaporozhets, created GitLab from his house in Ukraine. It was a house without running water, but Dmitriy felt that not having a great collaboration tool was a bigger problem than his daily trip to the communal well.

Credit: Sid Sijbrandij – Co-founder, Chief Executive Officer, and Board Chair of GitLab

In 2014, the two co-founders incorporated GitLab and applied to Y Combinator. What they were bringing to the world was a streamlined DevOps platform. DevOps stands for Development Operations and is the latest software development label used to describe the way in which three primary stakeholders work together to ensure that software gets delivered on time with a sufficient degree of quality.

Image showing what a DevOps is. Credit: Wikipedia
Credit: Wikipedia

A DevOps platform is the backbone of any business that builds software. As software eats the world, slinging quality code on time becomes increasingly important. Back in the day, a development team might have used Microsoft Visual SourceSafe to store code, Microsoft SharePoint to track issues, and Rational Unified Process to pull it all together. With GitLab, there’s no longer a need to cobble together half a dozen tools from half a dozen vendors. The homegrown development tools configuration is what GitLab lists as their primary competitor.

We view our primary current competition as customers’ legacy approach of DIY DevOps, using a combination of point tools manually integrated together. 

The $2 Trillion Gorilla

The company continues, “beyond this legacy approach of DIY DevOps, our principal competitor is Microsoft Corporation following their acquisition of GitHub.” If you don’t sling code for a living, you’ll need to pay attention closely to distinguish between two similar-sounding companies. GitLab (+30 million users est.) and GitHub (+65 million users est.) are two offerings with similar names and similar value propositions. Both are based on an open-source software called Git which was started by Saint Linus Torvalds who created Linux. In 2018, Microsoft acquired GitHub for $7.5 billion. Today, GitLab is worth more than twice as much with a present market cap of $16.5 billion, but that doesn’t mean it’s fairly valued.

Using our simple valuation ratio, GitLab comes in around 76:

  • Market cap / annualized revenues
    16,500 / 216.114 = 76

Below, we’ve pulled a handful of SaaS companies from our +350 tech stock catalog to use as a comparison. Only one company – Snowflake – has a higher valuation than GitLab.

CategoryCompanyValuation Ratio
ComputingSnowflake Inc79
ComputingSentinelOne 71
ComputingCrowdStrike41
Artificial IntelligenceUiPath39
Artificial IntelligenceSchrodinger35
Artificial IntelligencePalantir32
FintechDocuSign28
IoTProcore25
IoTC324
ComputingKnowBe418
Artificial IntelligenceSplunk10
Artificial IntelligenceAlteryx10
Artificial IntelligenceSumo Logic9

For those of you who ask for price targets, we’d only consider going long GitLab if they traded at $60.25 per share or less. But valuation is only one concern we have about GitLab. The other surrounds the extent to which their offering would be considered software-as-aservice (SaaS).

GitLab Moves to SaaS

In a recent article, we looked at The Best SaaS Stocks and How to Find Them. We presented three categories – “Pure SaaS,” “Some SaaS,” and “No SaaS.” GitLab falls into the “Some SaaS” category, even though all their revenues come from subscriptions. It’s important to explore the nuances between a subscription model and a SaaS subscription model.

GitLab prices access to their DevOps platform on a per-seat basis using a freemium offering.

Credit: GitLab

If you’re a company that uses GitLab, you’ll buy as many licenses as you have engineering staff. If a new Quality Assurance (QA) engineer comes on board, you’ll buy another license. You’ll usually cut back on licenses only when there’s a cost-cutting initiative. With a SaaS business model, the pricing would typically move to a fixed amount of annual spend that’s tied into a multi-year contract. That provides a lot less revenue volatility over time than a per-seat model that moves according to the number of bodies at any given time.

GitLab is going in the right direction by describing their business using SaaS metrics, but their S-1 filing shows that only a fraction of their business has been converted to SaaS – about 20% as of July 2021 – though the number is growing rapidly. That transition is particularly important in making it difficult for existing customers to switch providers in times of economic turmoil.

A GitLab Bear Thesis

Typos aside, CNBC wrote a decent piece on the GitLab IPO which talked about a report this week that said “GitLab should be valued as low as $770 million, or 95% below its current price.” That seems a bit extreme, but the underlying bear thesis is worth pondering.

GitLab sells one thing – subscriptions to their DevOps platform. A giant firm like Microsoft offers a similar product which represents a small fraction of their entire product line. Microsoft can practically give away access to GitHub and not suffer much economic damage. In fact, their pricing appears to be at a substantial discount to GitLab based on what it says on the tin.

Credit: GitHub

There’s one factor that’s not being considered here which is the culture of the user base. Programmers can be viciously loyal to open-source products vs. anything produced by for-profit firms, especially The First Galactic Empire. We’re not big fans of memes, but the one below probably sums up the whole thing best.

Credit: Reddit

The fact that GitLab isn’t Microsoft is a selling point. Gitlab checks all the boxes – a free-spirited leadership team that publishes the company handbook online for everyone to see, a company that eats its own dogfood with a release on the 22nd of every month for over nine years, and a corporate culture that focuses on results.

Some companies talk about being a ‘Family.’ We don’t think that is the right perspective. At GitLab, the relationship is not the end goal. The goal is results.

Credit: GitLab

The above statement should be painted on the wall of every meeting room in every corporation. Leave your feelings at the door. The focus is always on results. Good programmers understand how important that is. At a $2 trillion company like Microsoft, hurting someone’s feelings can get you in big trouble these days.

But a dislike of Microsoft will only get you so far when times get tough, and your manager wants you to cut costs or they’ll cut your bonus. Take Goldman Sachs for example. With 10,000 engineers on staff, that’s about an $11,880,000 annual expenditure on GitLab licenses (10K X $99 per seat, per month). Switching to GitHub at $21 a seat would save Goldman about $9,360,000 a year. We’ve oversimplified things here, but the point is this. When times get tough – and they haven’t been that way for a long time now – organizations take a long hard look at costs, personal preference be damned. That could put GitLab in a tight spot if the global economy goes pear shaped when damages from The Rona finally become priced in.

Conclusion

There’s a lot to like about GitLab the company, but less to like about GTLB stock. The first hurdle for the company will be to successfully convert their recurring revenues to a SaaS business model. Then, they’ll need to show investors some vision of expanding beyond just a single DevOps platform subscription into complementary business areas. As a publicly traded company, they have more options when it comes to acquiring new products that can be sold to existing customers. We like the company, but it won’t find a place in our own tech stock portfolio until it matures a bit and achieves a reasonable valuation.

If software is eating the world, then you'll definitely want to be holding some software-as-a-service (SaaS) stocks. Become a Nanalyze Premium annual subscriber and get immediate access to our portfolio of ~30 tech stocks which includes 6 pure-play SaaS stocks in fintech, IoT, and AI.

10 thoughts on “GitLab Stock: An Overvalued DevOps Pure Play
  1. All three main competitors were about the same from a product point of view back in 2018. It changed when Microsoft acquired GitHub, they made significant progress and GitHub is a superior product to GitLab or Atlassian (Bitbucket).

    Another critical difference is that GitHub was always SaaS (freemium), while GitLab’s main selling point was it’s a free self-managed product (because your source code can’t leave your building, at least not before 2018). You buy support when you need it. They will have a hard time pivoting to SaaS.

    1. This whole “source code can’t leave the building” thing is critically important for some firms.

      When tech types want to talk about a “superior product” they often do so in the context of functionality when it’s far more important to do a comparison at a broader level and consider things like business model and pricing.

      This is an interesting comment, thank you for leaving it.

  2. Sorry Martin, but you’re completely wrong. Gitlab’s CI/CD tools are superior when comparing with GitHub. Sure, they’ve made some good progress at Github in recent years, thanks to the Github Actions, but they still fall way behind Gitlab in my opinion. Also, I think Gitlab is doing great, both as on-prem and as a SaaS product.

    1. (Grabs popcorn.) Debating which product is “superior” is difficult without first establishing what criteria is being used. If we’re going to look at progress being made by GitLab to convert to SaaS, they’re providing that metric in their financials. From what we recall, it’s progressing at a decent clip. Right now, shares are valued at a very high premium, so that’s also something would-be investors should be considering.

    1. Thanks for that scathing review.

      Some examples of how the article was poorly written would go a long way towards helping the author recover from the pit of despair and self loathing they’ve descended into following your comment.

  3. Some companies may still have a perception of GitHub being open source and keeping repos there might be a risk to companies that want to feel their code is more secure in other platforms(gitlab, bitbucket). While gitlab does not have this perception problem. I think the tools are very similar for both, and I enjoy using both.

Leave a Reply

Your email address will not be published. Required fields are marked *