San Francisco-based GitLab Inc. (GTLB) develops software for the software development lifecycle. The stock closed at $103.89 on its first day of trading on the NASDAQ on October 14, driving its market capitalization to $14.90 billion. This was well above its expected range of $66 to $69 per share and an expected valuation of about $11 billion. GTLB shares climbed 35% in price on their first day of trading. However, the stock has slumped 41.7% over the past month and 14.8% over the past five days to close its last trading session at $75.00. Furthermore, the stock is trading well below its 50-day and 200-day moving averages.

Although the company reported solid topline growth in its fiscal third-quarter results, its bottom line remained bleak. GTLB’s revenue came in at $66.80 million, up 58% year-over-year. However, its net loss increased 12.6% year-over-year to $41.20 million. The company expects to generate revenue of $69.50 - $70.50 million in the current quarter, while its net loss per share is expected to be around $0.26 - $0.25. “We are pleased with our dollar-based net retention of over 130% and the positive business outcomes we continue to drive for our customers across all verticals around the world. The market for DevOps platforms is underpenetrated, and as a pioneer of The DevOps Platform, GitLab is well-positioned to make the most of the substantial market opportunity before us,” according to GitLab CEO, Brian Robins.

However, following its third-quarter earnings release, Piper Sandler analyst Rob Owens lowered GTLB’s price target to $100 from $120 while maintaining a Hold rating. Also, Cowen & Co. analyst Derrick Wood reduced the price target to $130 from $145. Furthermore, the company’s current valuation does not justify its underlying fundamentals, putting its valuation metrics at astronomical levels. And its beta of 1.61 indicates high volatility.

Click here to check out our Software Industry Report for 2021

Here is what could shape GTLB’s performance in the near term:

Stretched Valuation

In terms of forward EV/Sales, GTLB is currently trading at 40.62x, which is 883.1% higher than the 4.13x industry average. Also, its 44.29 forward Price/Sales ratio is 973.7% higher than the 4.12 industry average. Also, GTLB’s 10.47x forward Price/Book is 81% higher than the 5.79x industry average.

Poor Profitability

GTLB’s negative 97.97% and negative 103.79% respective EBITDA and net income margins are substantially lower than the 14.60% and 6.42% industry averages.

Moreover, GTLB’s ROA and ROTC of negative 22.30% and 55.23%, respectively, compare with the 3.62% and 4.97%industry averages.

Weak Bottom Line

GTLB’s gross profit increased 58.9% year-over-year to $59.61 million in its  fiscal third quarter, ended October 31. However, its non-GAAP operating loss stood at $23.90 million, up 1.6% from the same period last year. Its total cost of revenue grew 55.2% from its  year-ago value to $7.20 million. And its non-GAAP loss per share came in at $0.34, indicating a slight decline from its prior-year quarter. Also, its trailing-12-months net operating cash flow was  negative $56.08 million.

POWR Ratings Reflect This Bleak Prospects

GTLB has an overall D rating, which translates to Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a D grade for Stability, consistent with its high beta.

GTLB has a D grade for Value. Its stretched valuations justify this grade.

Of the 168 stocks in the F-rated Software – Application industry, GTLB is ranked #126.

Beyond what I have stated above, you can also view GTLB’s grades for Sentiment, Growth, Momentum, and Quality here.

View the top-rated stocks in the Software – Application industry here.

Bottom Line

The high demand for software development and management services has benefitted GTLB. Also, its DevOps platforms are facilitating its growth. However, its weak bottom line and negative income margins are a concern. In addition, analysts expect its EPS to remain negative until the next year. The stock looks overvalued at its current price level. Thus, we think the stock is best avoided now.

How Does GitLab Inc. (GTLB) Stack Up Against its Peers?

While GTLB has an overall POWR Rating of D, one might want to consider investing in the following Software – Application stocks with an A (Strong Buy) rating: Open Text Corporation (OTEX), Commvault Systems, Inc. (CVLT), and Oracle Corporation (ORCL).

Click here to check out our Software Industry Report for 2021

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GTLB shares fell $75.00 (-100.00%) in premarket trading Monday. Year-to-date, GTLB has declined -27.81%, versus a 27.14% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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