Over the past six months, GitLab has been a great trade, beating the S&P 500 by 9%. Its stock price has climbed to $62.60, representing a healthy 18.4% increase. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now still a good time to buy GTLB? Or are investors being too optimistic? Find out in our full research report, it’s free.
Why Are We Positive On GTLB?
Founded as an open-source project in 2011, GitLab (NASDAQ:GTLB) is a leading software development tools platform.
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 $701 million in Q3, and over the last four quarters, its year-on-year growth averaged 34.6%. 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. Outstanding Retention Sets the Stage for Huge Gains
One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.
GitLab’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 127% in Q3. This means GitLab would’ve grown its revenue by 27.2% even if it didn’t win any new customers over the last 12 months.
GitLab has an excellent net retention rate. This data point proves that the company sells useful products, and we can see that its customers are satisfied and increasing their usage over time.
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 89% gross margin over the last year. That means GitLab only paid its providers $11.00 for every $100 in revenue. 
Final Judgment
These are just a few reasons why GitLab ranks highly on our list, and with its shares outperforming the market lately, the stock trades at 12.4× forward price-to-sales (or $62.60 per share). Is now the right time to buy? See for yourself in our full research report, it’s free.
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