Over the past six months, GitLab’s shares (currently trading at $33.17) have posted a disappointing 10.9% loss, well below the S&P 500’s 6.3% gain. This might have investors contemplating their next move.
Following the pullback, is now the time to buy GTLB? Find out in our full research report, it’s free.
Why Is GTLB a Good Business?
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. Skyrocketing Revenue Shows Strong Momentum
A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, GitLab grew its sales at an incredible 42.2% compounded annual growth rate. Its growth surpassed the average software company and shows its offerings resonate with customers.
2. 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 $1.00 billion in Q1, and over the last four quarters, its year-on-year growth averaged 24.9%. 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. 
3. 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 86.8% gross margin over the last year. Said differently, roughly $86.76 was left to spend on selling, marketing, and R&D for every $100 in revenue.
The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. GitLab has seen gross margins decline by 2.9 percentage points over the last 2 years, which is among the worst in the software space.
Final Judgment
These are just a few reasons why we think GitLab is a high-quality business. After the recent drawdown, the stock trades at 4.6× forward price-to-sales (or $33.17 per share). Is now a good time to buy? See for yourself in our in-depth research report, it’s free.
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