GitLab Inc.

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 4/5

GitLab Inc. is a software development platform that aims to bring together development, operations, IT, security, and business teams in order to deliver continuous software.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: GitLab, Inc. operates an open-core, software-as-a-service (SaaS) business model, providing a unified DevOps platform. This allows companies to manage all stages of software development, from planning to releasing and monitoring.

The company’s platform is available in multiple tiers, including a free version, a self-managed version, and a hosted SaaS version. GitLab emphasizes a single application platform that incorporates core DevOps functions, including source code management (SCM), continuous integration (CI), and continuous delivery (CD), with security features integrated throughout. They are specifically focused on accelerating innovation and streamlining workflows in software-based organizations.

Revenue Distribution and Growth:

  • GitLab generates revenue primarily through subscription services, encompassing self-managed subscriptions, SaaS subscriptions, and licenses.
  • A significant portion of their revenue is recurring which is very important as we analyze companies over time.
  • Professional services and other revenues account for a smaller portion of the total.
  • GitLab has enjoyed substantial revenue growth in recent years, as seen in their latest 10Q. In the most recent quarter (Q3 FY2024), the company’s total revenue reached $149.1 million, with subscription revenue accounting for a significant $145.7 million, reflecting a solid 28% year over year growth rate.

This consistent growth, particularly in subscription revenue, highlights the company’s ability to attract and retain customers.

  • They see an increase in recurring revenue from their customers, reflecting their ability to retain customers.
  • Gitlab sees their customer growth is skewed to smaller companies using their self managed offering, though they are targeting higher-revenue enterprises for continued growth.
  • Their revenue from the US, Europe, and Asia-Pacific has been consistently growing.

Industry Trends:

  • The software development industry continues to expand, with the rise of cloud-based platforms, the need for collaborative devops, and demand for rapid software innovation.
  • There is an increased focus on efficiency, security, and compliance in software development pipelines, which has been driven by the increase in regulation and cyber security threats and hacks.
  • The market is very competitive and is also fragmented, which has made it hard for startups to disrupt established players like Gitlab.

Margins:

  • GitLab maintains a high gross margin at around 88-89%, which signals some good pricing power.
  • The company is operating at a loss still and its profitability is still negative.
  • Their operating margins are improving, but still are very negative, indicating high spending.
  • Their non-GAAP operating margin is very low (2%), indicating difficulty to grow the profitability from the business.

While gross margins are strong, the company’s net profitability is still negative, indicating high spending on growth initiatives which is essential to create a business with a large moat.

Competitive Landscape:

  • GitLab faces intense competition in the DevOps market.
  • Competitors like Microsoft and Atlassian are competing in this space
  • The market is becoming increasingly crowded
  • There are numerous start-ups coming into the market, who are trying to compete with legacy players.

What Makes the Company Different:

  • GitLab offers a unified DevOps platform and this helps companies streamline their workflows and reduce costs.
  • They have a focus on community, transparency, open source and an all remote work structure which improves their ability to attract talent.
  • Their open-core business model, allows the company to share its product with the public and increase its product adoption.
  • The company’s pricing also offers a range of offerings for companies of all sizes, offering subscription levels with free tier plans for early stage customers.

Moat Rating and Justification: 2/5

  • Network effects: Partially. It is still unclear how strong the network effects of GitLab are, as it does not have as much stickiness when compared to network companies like VISA or MasterCard, where all of the users need to adopt its services, in this sense there is still some kind of lock-in present with their software offerings, but it is probably not as great as it would be in a traditional networking company.
  • Switching costs: There are somewhat high switching costs, as companies may find it expensive to move code and data to competitors; however there are tools available to do that so the switching cost isn’t as strong.
  • Intangible assets: Some. The GitLab brand has become well recognized as of late. However it is not clear how much real value the brand has over other alternatives or whether it provides a moat or not. It could be a moat in some instances, because it’s open source, it is possible for them to benefit from a very large community of contributors that improve their code base, leading to better functionality and higher customer satisfaction.
  • Cost advantages: Marginally, Some. GitLab has focused more heavily on software and automation rather than physical infrastructure. This gives them a small advantage in cost.
  • Overall, based on the points above, the company can be assigned a “narrow” moat, but does not have enough features to support the idea of a “wide” moat.

Risks to the Moat and Business Resilience:

  • Intense Competition: The software development market is becoming increasingly competitive, with established players and many startups. This can erode GitLab’s pricing power and market share, hurting their economic moats.
  • Technological Disruption: Rapid technological advancements could render GitLab’s technology obsolete, as was evidenced by the recent rise in AI-based development tools. It’s essential that the company keeps up to date with the latest innovation, and implement it to provide long-term shareholder returns.
  • Loss of Customers: Customers, in particular enterprise-level ones, could defect from GitLab for a competitor, and not adopt the software over time. As they are dependent on subscriptions, this is extremely detrimental to the business.
  • Dependence on Open-Source: While their open-source approach is a strength, it also has the risk of someone forking the code and disrupting their revenue model and creating an open-source competitor that can potentially use the codebase to provide a free solution for users.
  • Economic Cycles: A slowdown in the broader economy can affect software spending by firms and reduce the demand for their platform. This has affected several tech companies before.
  • Increased Regulation: Governments across the world are increasing regulation for software providers. A change in the laws for software providers or regulation to open source can harm the business.
  • Sales Cycles: It can often take a while to get new customers, as well as upsell the existing ones, this makes the sales cycle slow and may not see high revenue upticks right away.
  • Inability to Improve Profitability: There is a chance the company’s high expenditures may keep its profitability in the red and they are unable to improve their operating and net margins in the long term, especially given intense competition in the market.

  • Debt: While the business does not carry too much debt, its convertible debt can have a dilutive impact if the stock were to underperform. This is usually the case with debt. They are also tied to various interest rate benchmarks that can adversely affect the company if these rates rise.

  • Management: Recent management transitions include a new CFO which could bring changes in strategy of the business.

Despite the risks mentioned above, Gitlab does benefit from a strong recurring revenue stream, as most of their revenue comes from subscriptions and SaaS, which gives them some business resilience. The platform that they are making is also highly specialized, has a wide breadth of features and also covers all of the various segments of Devops. This gives some protection against new startups that are trying to compete in certain niches.

Financials In-Depth:

  • Balance Sheet:
  • GitLab possesses a strong balance sheet, with $834.8 million in cash and short-term investments and $172.3 million in debt. This means they have a net cash position of $662.5 million. This is pretty strong, as the company can weather difficult macroeconomic conditions or have a cushion for future potential acquisitions.
  • The company does have a deferred revenue liability, which represents the services that they sold which they haven’t completely recognized. This is normal for SaaS business.

  • They have an accumulated deficit of -$921.1 million, which has decreased substantially from -$1,090.3 million in 2022 indicating the company is getting closer to profitability.

  • Income Statement:
    • GitLab’s revenues have been growing very strongly, as the company is still in the high-growth phase. In the recent 10-Q, their revenue grew by 28% year over year to $149.1 million.
    • While GitLab’s gross profits are strong, it seems to be a lot less profitable after accounting for operating expenses. The gross profit is 88%, while their non-GAAP operating margin is about 2%. This suggests the business is spending heavily on expansion and marketing to grow the business and capture as much market share as possible.

  • For the first 9 months of the year ended 2024, they reported a net loss of -$417.6 million, compared to -$172 million for the same period last year. This increase in losses suggests that the management is not focused on profitability and is still in the growth phase.

  • Cash Flows:
    • From Q3 of FY2024, the company had a net cash from operating activities of -$10.2 million and total free cash flow of -$14.6 million. This indicates the company is currently not generating positive cash flows, and may have to rely on borrowing or external funding in the future. As the business matures, these cash flow numbers may improve.
    • The company has been investing in a lot of capital expenditure to enhance its infrastructure and operations, which have been contributing to the negative cash flows from operations.

Despite not being profitable, the company’s revenue growth is quite impressive. They also have a great cash balance to weather any slowdown in the business, while focusing on high revenue growth and profitability.

Controversies and Recent Problems

  • The company is working on improving their internal controls to comply with the new rules mandated by the SEC. This has caused them to incur some material weaknesses. They are making improvements to these controls and processes.
  • In the most recent 10Q, the company stated their intention to make changes to their management team to support their global growth and strategic partnership plans.

Understandability Rating: 4 / 5

  • GitLab is a Software as a Service (SaaS) business, which is easy to understand.
  • They make a platform for other developers and for collaboration which is easy to grasp.
  • Their revenue model is relatively simple to understand.
  • The competitive nature of the industry, however, is quite complex, as there are many aspects of the business that investors need to look out for, such as network effects and switching costs, which makes the business more difficult than a general retail business, but not overly complex to understand.

Balance Sheet Health Rating: 4 / 5

  • GitLab maintains a very strong balance sheet with high cash holdings and low debt.
  • The company’s cash balance allows them to weather any economic downturn and take opportunities as they arise.
  • Their negative net-income and free cash flow might prove risky if it continues for the long term, however, their strong balance sheet provides a buffer against this.
  • In addition, the business is still young in the growth lifecycle and so it is normal that they are sacrificing profit for high growth opportunities.

In Conclusion: GitLab is a strong software company with solid growth prospects, but faces increasing competition. It is positioned well to take market share in the software development sector. It has a strong cash position, which will give them plenty of options moving into the future.