October 13th GitLab (NASDAQ:GTLB) had a successful initial public offering at a share price of $ 77 per share. Almost a month later, GTLB stock is now $ 121.27. So practically everyone who bought in around the time of the IPO made money.
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The problem is that there is no more money on the table for future investors. What I mean is that with market c – currently at $ 18.267 billion, it’s very difficult not to say that GTLB stock is very overvalued. I also calculated this market c – by taking the final total number of shares outstanding from page 10 of the prospectus.
Why GitLab is overrated
Last year (ending January 2021) the company had sales of just $ 152.2 million. Even in the six months ended July 31, it had only $ 63.9 million in sales. In addition, analysts are only forecasting revenue of $ 231 million this year and $ 314 million next year.
This brings its ongoing price-to-sales (P / S) metrics to astronomical levels. Just look at how high the market valuation is now compared to the sales. If we divide its market c – of $ 18.267 billion by its forecasted revenue of $ 231 million for that year, that’s 79 times its revenue.
This would be an astronomical metric even if it were a price / earnings (P / E) valuation. Even using the revenue forecast for the next year, which is 35.9% higher to $ 314 million, the P / S multiplier is still high at 58.2.
Additionally, these high P / S multiples could be tolerable if the company has been profitable or even predicts it will soon be profitable. But that’s not the case here.
Gitlab lost $ 192 million last year (see page 79 of the prospectus) and in the first six months of this year it lost $ 69.05 million.
In fact, analysts don’t even expect the company to be profitable anytime after the year ended January 2024. Projected EPS (earnings per share) is viewed as a loss of $ 1.07 in 2023 and a loss of 72 cents for the year ended January 2024.
What is the problem
Overall, GitLab is a software development company that picks up customers according to the “freemium” model. It hopes that a percentage of its free software will eventually be upgraded to paid versions of its -p or software development kits.
The problem, as an analyst at Seeking Alpha points out, is that GitLab’s conversion percentage is very low at 1%. It has 40 million users but only 15,356 paying users. The company has three payment plans, according to the prospectus (page 71): $ 0, $ 19 per month per user, and $ 99 per month per user.
The problem is, it only has 3,632 “base” customers paying more than $ 5,000 in annual recurring income (ARR), or $ 416.67 per month. This can be seen on page 3 of the prospectus. Additionally, there are only 383 customers with annual recurring revenue (ARR) greater than $ 100,000 as of July 2021.
By my calculations, the median for each of these customers is likely closer to over $ 500,000. For example, let’s say these 383 customers account for 95% of our projected revenue of $ 231 million in 2021. Let’s increase this to 450 customers by the end of the year for simplicity. So if we divide $ 231 million by 450, the average customer revenue in 2021 is $ 513,000 per year.
In other words, the company is likely to be heavily dependent on a few large customers. In fact, the prospectus contains a list of -proximately 50 of these, which are highlighted on pages 115 and 116 of the prospectus. These are the core customers who pay GitLab to provide the software development tools for their businesses.
In conclusion, the point is that it is very difficult to get big customers. The market may impose a premium that is far too high on these 50 or so customers.
What to do with GTLB shares
Overall, the most rational -proach here would be to wait for an opportunity to invest in GTLB stocks at a bargain price. Despite its growth, the market has fully valued or discounted this growth for quite a number of years.
This does not necessarily mean that GTLB stock will ever get che -er or that the stock will fall. It can only take longer for the company to “grow” to its current domed rating. For example, if the company becomes profitable, the market may have already forecast it in the share price. So at this point I suggest that most value investors will wait for a more rational entry price.
At the time of writing, Mark R. Hake had no position (direct or indirect) in any security mentioned in the article. The opinions expressed in this article are those of the author and are subject to InvestorPlace.com’s posting guidelines.
Mark Hake writes about personal finances mrhake.medium.com and runs the Guide to Total Yield Value which you can check here.