Over the past six months, GitLab’s stock price fell to $37.77. Shareholders have lost 16.3% of their capital, which is disappointing considering the S&P 500 has climbed by 11.7%. This might have investors contemplating their next move.

Following the drawdown, is now an opportune time to buy GTLB? Find out in our full research report, it’s free for active Edge members.

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. 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 $893 million in Q3, and over the last four quarters, its year-on-year growth averaged 29.3%. 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. 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 88% gross margin over the last year. That means GitLab only paid its providers $11.99 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 1.3 percentage points over the last 2 year, which is poor compared to software peers.

3. Excellent Free Cash Flow Margin Boosts Reinvestment Potential

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

GitLab has shown robust cash profitability, driven by its attractive business model that enables it to reinvest or return capital to investors while maintaining a cash cushion. The company’s free cash flow margin averaged 26.5% over the last year, quite impressive for a software business. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

Final Judgment

These are just a few reasons why we're bullish on GitLab. With the recent decline, the stock trades at 5.8× forward price-to-sales (or $37.77 per share). Is now a good time to buy? See for yourself in our comprehensive research report, it’s free for active Edge members .

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