GitLab Readies $598 Million IPO
Summary
- GitLab has filed proposed terms to raise $598 million in an IPO for the company and a selling shareholder.
- The firm provides a SaaS-based DevOps software platform for enterprises worldwide.
- GTLB has produced strong growth, excellent retention results and operates in a high-growth industry, so the IPO is worth a close look.
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Quick Take
GitLab (NASDAQ:GTLB) has filed to raise $598 million in an IPO of its Class A common stock, according to an S-1/A registration statement.
The firm provides a SaaS platform for bringing together software development, operations, security and IT functions.
GTLB’s steep growth trajectory, other operating metrics and strong industry growth tailwinds indicate substantial promise for the company ahead, so the IPO is worth consideration for growth-oriented investors.
Company & Technology
San Francisco, California-based GitLab was founded to create a DevOps platform that enables businesses to combine different technical and business teams on a single system for improving their digital innovation efforts.
Management is headed by founder, Chairman and CEO Sytse Sijbrandij, who has been with the firm since inception and was previously a founder at Comcoaster, a software firm.
Below is a brief overview video of GitLab:
(Source)
The company’s primary offerings for users by type include:
Business
Developers
Security
Operations
GitLab has received at least $425 million in equity investment from investors including August Capital, ICONIQ, Khosla Ventures and GV (Google Ventures).
Customer/User Acquisition
The company offers a free tier and two paid subscription tiers, all of which are offered as a self-managed solution.
GTLB also employs a direct sales force and utilizes partnerships with major tech firms who offer the company's platform on their marketplaces. The firm also has relationships with resellers who deal with large enterprise clients, digital transformation specialists like consulting firms and volume resellers.
Sales and Marketing expenses as a percentage of total revenue have dropped as revenues have increased, as the figures below indicate:
Sales and Marketing | Expenses vs. Revenue |
Period | Percentage |
Six Mos. Ended July 31, 2021 | 76.8% |
FYE Jan. 31, 2021 | 101.3% |
FYE Jan. 31, 2020 | 122.2% |
(Source)
The Sales and Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, was stable at 0.5x in the most recent reporting period, as shown in the table below:
Sales and Marketing | Efficiency Rate |
Period | Multiple |
Six Mos. Ended July 31, 2021 | 0.5 |
FYE Jan. 31, 2021 | 0.5 |
(Source)
The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.
GTLB’s most recent calculation was 17% as of July 31, 2021, so the firm needs improvement in this regard, per the table below:
Rule of 40 | Calculation |
Recent Rev. Growth % | 69% |
EBITDA % | -52% |
Total | 17% |
(Source)
The firm’s dollar-based net revenue retention rate for the three months ended July 31, 2021 was 152%, a very high result.
The dollar-based net revenue retention rate metric measures how much additional revenue is generated over time from each cohort of customers, so that a figure over 100% means that the company is generating more revenue from the same customer cohort over time, indicating good product/market fit and efficient sales and marketing efforts.
The company’s engagement metrics show steady growth over the past two years. Below is a chart showing average pages per visit, with desktop growing by about 12%:
(Source: Similarweb)
Market & Competition
According to a 2018 market research report by MarketsAndMarkets, the global market for DevOps was an estimated $2.9 billion in 2017 and is forecast to reach $10.3 billion by 2023.
This represents a forecast CAGR (Compound Annual Growth Rate) of a very strong 24.7% from 2018 to 2023.
The main drivers for this expected growth are a strong demand from enterprises for faster application development and delivery as enterprises continue a historic transition from on-premises legacy systems to cloud-based applications.
Also, the Asia Pacific region is expected to grow at the fastest rate of growth through 2023, although the North America region will still represent the largest market size worldwide, as the chart shows below:
(Source)
Major competitive or other industry participants include:
Microsoft/GitHub (MSFT)
Atlassian (TEAM)
IBM (IBM)
Micro Focus (MFGP)
Puppet
AWS
Oracle (ORCL)
CollabNet
Rackspace (RXT)
Perforce
HashiCorp
OpenMake
Others
Financial Performance
GitLab’s recent financial results can be summarized as follows:
Sharp growth in top line revenue
Increasing gross profit but slightly decreasing gross margin
High and fluctuating operating and net losses
High and increasing cash used in operations
Below are relevant financial results derived from the firm’s registration statement:
Total Revenue | ||
Period | Total Revenue | % Variance vs. Prior |
Six Mos. Ended July 31, 2021 | $ 108,057,000 | 69.2% |
FYE Jan. 31, 2021 | $ 152,176,000 | 87.3% |
FYE Jan. 31, 2020 | $ 81,227,000 | |
Gross Profit (Loss) | ||
Period | Gross Profit (Loss) | % Variance vs. Prior |
Six Mos. Ended July 31, 2021 | $ 94,440,000 | 67.8% |
FYE Jan. 31, 2021 | $ 133,713,000 | 86.1% |
FYE Jan. 31, 2020 | $ 71,851,000 | |
Gross Margin | ||
Period | Gross Margin | |
Six Mos. Ended July 31, 2021 | 87.40% | |
FYE Jan. 31, 2021 | 87.87% | |
FYE Jan. 31, 2020 | 88.46% | |
Operating Profit (Loss) | ||
Period | Operating Profit (Loss) | Operating Margin |
Six Mos. Ended July 31, 2021 | $ (55,859,000) | -51.7% |
FYE Jan. 31, 2021 | $ (213,884,000) | -140.6% |
FYE Jan. 31, 2020 | $ (128,367,000) | -158.0% |
Net Income (Loss) | ||
Period | Net Income (Loss) | |
Six Mos. Ended July 31, 2021 | $ (68,126,000) | |
FYE Jan. 31, 2021 | $ (192,194,000) | |
FYE Jan. 31, 2020 | $ (130,741,000) | |
Cash Flow From Operations | ||
Period | Cash Flow From Operations | |
Six Mos. Ended July 31, 2021 | $ (38,641,000) | |
FYE Jan. 31, 2021 | $ (73,580,000) | |
FYE Jan. 31, 2020 | $ (60,166,000) | |
(Source)
As of July 31, 2021, GitLab had $276 million in cash and $192 million in total liabilities.
Free cash flow during the twelve months ended July 31, 2021, was negative ($60 million).
IPO Details
GitLab intends to raise $598 million in gross proceeds from an IPO of its Class A common stock, offering 8.4 million shares and a selling stockholder offering 1.98 million shares at a proposed midpoint price of $57.50 per share.
Class A common stockholders will receive one vote per share and Class B holders will receive 10 votes per share.
The S&P 500 Index no longer admits firms with multiple classes of stock into its index.
No existing shareholders have indicated an interest to purchase shares at the IPO price.
Assuming a successful IPO, the company’s enterprise value at IPO would approximate $7.5 billion, excluding the effects of underwriter over-allotment options.
Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 7.27%. A figure under 10% is generally considered a ‘low float’ stock which can be subject to significant price volatility.
Management says it will use the net proceeds from the IPO as follows:
We currently intend to use the net proceeds we receive from this offering primarily for working capital and other general corporate purposes, which may include product development and general and administrative matters. We may also use a portion of the net proceeds for the acquisition of, or investment in, technologies, solutions, or businesses that complement our business. However, we do not have agreements or commitments for any acquisitions or investments outside the ordinary course of business at this time.
(Source)
Management’s presentation of the company roadshow is available here.
Regarding outstanding legal proceedings, management says the firm is not currently a party to any proceedings that would have a material adverse effect on its financial condition or operations.
Listed bookrunners of the IPO are Goldman Sachs, J.P. Morgan, BofA Securities and other investment banks.
Valuation Metrics
Below is a table of relevant capitalization and valuation figures for the company:
Measure [TTM] | Amount |
Market Capitalization at IPO | $8,223,352,208 |
Enterprise Value | $7,492,039,208 |
Price / Sales | 41.88 |
EV / Revenue | 38.16 |
EV / EBITDA | -35.89 |
Earnings Per Share | -$1.50 |
Float To Outstanding Shares Ratio | 7.27% |
Proposed IPO Midpoint Price per Share | $57.50 |
Net Free Cash Flow | -$60,137,000 |
Free Cash Flow Yield Per Share | -0.73% |
Revenue Growth Rate | 69.16% |
(Source)
As a reference, a potential partial public comparable to GitLab would be Atlassian; below is a comparison of their primary valuation metrics:
Metric | Atlassian (TEAM) | GitLab (GTLB) | Variance |
Price / Sales | 45.74 | 41.88 | -8.4% |
EV / Revenue | 46.89 | 38.16 | -18.6% |
EV / EBITDA | 681.37 | -35.89 | -105.3% |
Earnings Per Share | -$2.79 | -$1.50 | -46.3% |
Revenue Growth Rate | 29.4% | 69.16% | 135.09% |
(S-1/A and Seeking Alpha)
Commentary
GitLab is seeking to go public to fund its general corporate expansion initiatives.
The firm’s financials show strong growth in top line revenue along with increasing gross profit but slightly decreasing gross margin.
However, GTLB is producing high operating and net losses and high and increasing cash used in operations.
Free cash flow for the twelve months ended July 31, 2021, was negative ($60 million).
Sales and Marketing expenses as a percentage of total revenue have dropped as revenue has increased; its Sales and Marketing efficiency rate has been stable at 0.5x in the most recent reporting period.
The market opportunity for providing a SaaS platform for DevOps functions is large and expected to grow at a very high rate of growth over the coming years as enterprises continue their historic transition from on-premises systems to cloud-based collaboration platforms.
Goldman Sachs is the lead underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 23.3% since their IPO. This is a mid-tier performance for all major underwriters during the period.
As for valuation, compared to partial competitor Atlassian, the IPO appears reasonably valued on a revenue multiple basis, as GitLab is growing revenue at a significantly higher rate of growth.
The firm’s dollar-based retention rate is also quite impressive, in fact, it may be higher than Atlassian’s when it went public.
Although its high operating losses and cash burn are negative elements, GTLB’s steep growth trajectory, other operating metrics and strong industry growth tailwinds indicate high promise for the company ahead, so the IPO is worth consideration.
Expected IPO Pricing Date: October 13, 2021
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