GitLab (GTLB) Analysis

I have a small position in GitLab (GTLB). After the recent earnings report I wanted to look closer at the company to decide if it is worthy of being a larger position in my portfolio. As I am also a user of GitLab, I thought I would share a full write-up. I may at times be bit long winded in the below writeup, this post is as much for my own notes on the company as to share with the board.

I am a professional software engineer. While I am now semi-retired, I still use GitLab for my personal projects and I am still well connected to the software development community. I will endeavor to keep the technical perspectives to a minimum needed to support why I am invested in this company.

About GitLab

GitLab is a code repository and collaborative software development platform which handles all stages of the software development lifecycle. GitLab has both open a free open source offering and paid subscriptions which offer additional features. GitLab may be used via their SaaS platform or as self-hosted software.

As an investor I see no need to dwell on product details beyond this high level view, however it may at times be useful to understand the scope of what GitLab offers in order to compare it to competition:

• Project Planning and Progress Tracking

• Code Version Control (any text or binary file)

• Issue tracking (Bugs, feature requests, planned features, etc.)

• Continuous Integration (automated builds, testing, etc.)

• Continuous Deployment (create new software releases automatically)

• Simple website hosting (mostly used for documentation)

From The Company: GitLab is The One DevOps Platform that empowers organizations to maximize the overall return on software development by delivering software faster and efficiently, while strengthening security and compliance. GitLab’s single application is easier to use, leads to faster cycle time and allows visibility throughout and control over all stages of the DevOps lifecycle. With GitLab, every team in your organization can collaboratively plan, build, secure, and deploy software to drive business outcomes faster with complete transparency, consistency and traceability.

Finances

Quarterly Results: https://ir.gitlab.com/financial-information/quarterly-result…

GitLab is very new as a public company with an IPO on 31 October 2021. Because of the short history, I have included the prior year numbers (pre-IPO) included in earnings press releases in order to better evaluate the company.

Revenue: Thousands


             Q1          Q2         Q3         Q4
FY:2021                         $ 42,152   $ 46,147
FY:2022  $ 49,930   $  58,127   $ 66,800   $ 77,796
FY:2023  $ 87,407   $ 101,041

FY:2023 Q:3 Guidance: $105,000 - $106,000
FY:2023 Guidance:     $411,000 - $414,000

Revenue: YoY Growth


             Q1          Q2         Q3         Q4
FY:2022                           58.47%     68.58%
FY:2023    75.06%      73.83%

Revenue: Sequential Growth


             Q1          Q2         Q3         Q4
FY:2021                                       9.48%
FY:2022     8.20%      16.42%     14.92%     16.46%
FY:2023    12.35%      15.60%

EPS: Non-GAAP


             Q1          Q2         Q3         Q4
FY:2021                         $ -0.44    $ -1.20
FY:2022  $ -0.44     $ -0.49    $ -0.34    $ -0.16
FY:2023  $ -0.18     $ -0.15

FY:2023 Q:3 Guidance: $ -0.15 - $ -0.16
FY:2023 Guidance:     $ -0.67 - $ -0.64

Gross Margin: Non-GAAP


             Q1          Q2         Q3         Q4
FY:2021                           89.00%     89.00%
FY:2022    87.00%      88.00%     90.00%     88.00%
FY:2023    89.00%      87.00%

Dollar Based Net Retention Rate (DBNER):


FY:2022 Q:3 >130%
FY:2022 Q:4 >152%
FY:2023 Q:1 >130%
FY:2023 Q:2 >130%

Customers with more than $5,000 of ARR:

FY:2022 Q:3 4,057 up 66% YoY
FY:2022 Q:4 4,593 up 67% YoY
FY:2023 Q:1 5,168 up 64% YoY
FY:2023 Q:2 5,864 up 61% YoY

Customers with more than $10,000 of ARR:

FY:2022 Q:3 427 up 73% YoY
FY:2022 Q:4 492 up 74% YoY
FY:2023 Q:1 545 up 68% YoY
FY:2023 Q:2 593 up 55% YoY

FY2023 Q2 Investor Presentation Notes

https://ir.gitlab.com/static-files/d7a81085-6445-4568-95c4-e…

High Growth Potential:
• Estimated Total Addressable Market: $40 billion
• 85% of organizations use 2 - 10 tools for software development
• 69% of organizations want to consolidate toolchains

Personal Note: This mirrors my personal experience in the industry

Marketing Model: Land and Expand
• Begin with developers
• Expand to other users, departments, projects, and use cases
• Expand to ‘Ultimate’ tier capabilities.

Personal Note: In my experience, GitLab is an infectious tool. It makes life simple in many ways and integrates easily with many different aspects of the software development lifecycle which all become natural as you use GitLab.

Earnings Call Transcript Notes: FY2023 Q2

https://ir.gitlab.com/static-files/83ba01c8-acd1-4fe5-9928-7…

[Sid Sijbrandij] Our differentiation starts with our core value of Iteration, which in turn drives our rapid pace of innovation. GitLab is far ahead in the comprehensiveness of its DevOps platform. Every month on the 22nd, we ship a new version of GitLab with many new features and improvements. We’ve done this for 130 months in a row. Our innovation is also driven by the open core nature of GitLab. Which means our customers and users contribute to the capabilities of the platform, enabling us to drive even more differentiation and value for all of our customers. Every quarter hundreds of improvements are contributed by our customers.

[Sid Sijbrandij] Our differentiation also extends to security and compliance. In today’s environment, security is a business imperative. We believe we have the most comprehensive security offering in the market, enabling companies to truly adopt DevSecOps practices.

[Sid Sijbrandij] The third area of innovation involves our use of Artificial Intelligence and Machine Learning. […] To illustrate how we are leveraging AI to improve the product, we now have a feature where GitLab will suggest to developers who should review their code. […] To invite more personas to the platform like Data Scientists, we are also integrating the DevOps process with the MLOps process. We see this as the next big step in consolidating historically separate development workflows. Today, machine learning is an essential part of modern application development.

[Sid Sijbrandij] Let me give you examples of a new logo win […]. a North American-based global leader in cross-border peer-to-peer payments needed a DevOps platform that streamlined and automated processes, reduced cycle time, and provided the ability to set and enforce organizational policy across every stage of their development process. From a GitLab proof of value engagement, they realized a 30% efficiency improvement in building, securing, and deploying versus their previous tool chain implementation for new and changing applications. As a result, they became a GitLab SaaS Ultimate customer, replacing a previous vendor’s implementation.

Personal Note: See the transcript for more examples.

Earnings Call Q&A Notes: FY2023 Q2

https://seekingalpha.com/article/4539302-gitlab-inc-gtlb-q2-…

Q:[Matt Hedberg] […] it sounds like you’re not seeing any real macro pressure. It doesn’t feel like you’re embedding anything into your guide. Was it sort of just – like a linearity question, was it sort of business as usual for you guys? Was there any more back-end loaded nature of the quarter? Just maybe a little bit more granularity on that side.

A:[Brian Robins] Yeah, absolutely. We’re super happy with the quarter to grow 74% year-over-year and then also to add the largest number of base customers in the company history. When we went back and looked at the sales cycles, the sales cycles are actually compressing this quarter. So we didn’t see any elongation.

Q:[Michael Turits] Sid, I think there – it’s fantastic what you’ve done and it’s in an environment where people are cutting back, including some reports of developer hiring cutting back. So, at that high level, what’s making it work that you continue to grow at these rates even while some developer hiring is cutting back and there are probably some projects that are being cut. And then I have a question – quick sort of a housekeeping question for Brian.

A:[Sid Sijbrandij] Thank you very much, Michael. We’re definitely seeing that companies are cutting back on hiring developers, that they are sometimes instituting a hiring freeze. And the situation they’re faced with is that they have to do more with the people they already have, and GitLab enables them to do that.

When they move to GitLab, they save on the integration effort. So the people who before were doing the integration of DevOps tools can start doing something that adds value to the business directly. Second, all their existing people get more efficient with GitLab because you don’t have to go from point solution to point solution to point solution to get more work done in a day. So, they can – without hiring, it kind of feels like they have more development capacity.

And last but certainly not least, GitLab helps them to go faster. So, they’re able to move to the cloud faster, close their data centers and free up those people to directly add to their business. So, on three levels, moving to a platform helps. And that’s why in this environment, GitLab is mission-critical. Companies are willing to free their budget for it. And it’s not an option to not do this, they have to undergo the digital transformation. They have to move to the cloud.

A:[Brian Robins] Yeah. Before I answer that, let me just add on to Sid’s comments just a little. Our cohorts from seven years ago are still expanding with us today.

The Open Source Conundrum

As an investor I am very sceptical of any company which is based around open source software for all the same reasons which have often been discussed on this board. Here is an overview of how GitLab has built a successful business around open source software:

• The free (open source) version of GitLab is available to anyone at no cost but has very limited features.

• A ‘premium’ paid plan adds many features at a reasonable cost per user, many of which become necessary for a project of any notable size.

• An ‘ultimate’ paid plan adds more features at a high cost per user but provides features necessary for large scale projects.

• Any open source software project may apply to use the ‘ultimate’ tier plan for free.

As both a professional software engineer and investor I am very satisfied with these offerings. The paid features add significant value and are appropriately targeted at projects (and thus companies) of increasing size and complexity. While the free option does offer the option for a private repository and may be used for a commercial project, its features are limited such that it is only useful for a very small scale projects which would likely not contribute significantly to revenue.

It is important to note that ‘git’, the software version control system used by GitLab, is the most widely used version control system in open source projects and likely the most widely used in commercial projects (though as far as I know, exact statistics are not available). The fact that the fundamental tool, git, is free software is in this case irrelevant because by itself git is only a tiny portion of the overall software development lifecycle. Even small personal projects need the additional features provided by a platform such as GitLab.

Taken in this context, I see the free offerings provided by GitLab as a smart marketing decision. Open source developers and hobbyists become familiar with the platform and will bring that knowledge into their workplace. Small business startup projects can test the GitLab platform indefinitely and scale up the features used (to paid plans) as their own software becomes successful.

Furthermore, GitLab encourages users to contribute to the GitLab software. Even for paid features, code is available (but not open source). Both the open source community and corporate customers may contribute new features for consideration. All indications I can find online are that GitLab is very responsive to code contributions. Based on my own personal experience in the software industry, this trikes me as a smart move that will build a lot of loyalty to their platform and likely add unique features which keep exiting companies from moving to other platforms.

This is a rare case where I do not see the use of open source software as a risk to my investment.

Competition, moat, and why GitLab is popular

Examining competition is a bit more complex when considering GitLab than for most companies because it is best evaluated in terms of both the underlying version control system (git) and the actual company offering (a collaborative software development platform for all stages of the software development lifecycle).

The underlying tool GitLab is built around (git) is almost certainly the most widely used version control system, and likely by a wide margin. The reasons for this are irrelevant to the analysis of GitLab as a company, but is worthy of note because it means that if a users leaves the GitLab platform they are for more likely to transition to another platform based on git than to a platform based around a different version control system.

The primary competition to GitLab is GitHub, which is owned by Microsoft. While GitHub has a larger user base (56 million users) compared to GitLab (30 million users), it is very important to understand the nature of those users and the history of GitHub.

GitHub was the first collaborative software development platform based around git and as a result it still has the first mover advantage. However, it was acquired by Microsoft in 2018 which angered many people in both open source and corporate environments leading to a large transition to other platforms, primarily GitLab. GitHub is remains a powerful tool and is the primary platform of choice for open source projects, however they have all the expected limitations of being attached to a large corporation. Since the acquisition by Microsoft, GitHub has changed relatively little compared to the rapid advances being made by GitLab.

Bitbucket is the next largest competitor based around git, coming in at 10 million users, and does not seem to be any significant competition. After this, one must look to platforms that do not use git as the core version control system. While there are a number of other platforms which are commonly used in the software community, none have the degree of presence of GitHub and GitLab. Many of those other platforms are tied into a larger ecosystem of corporate tools and as such are not as directly in competition.

When considering competition it is also instructive to consider integration with other SaaS tools, both free and paid. There are many enhancements possible beyond what a collaborative software development platform can offer on its own, and many of these companies permit easy integration between the development platform and external tools. As I survey those available integrations, GitHub and GitLab are by far the most common options in the external tools.

The question of moat is important. Why would a user stay with GitLab and not switch to a different system? On the surface, it seems there is little that should be sticky with GitLab. GitHub is very similar GitLab and even offers a system to import existing projects from GitLab into GitHub. GitLab offers a similar import option as a mechanism to transition away from GitHub. However, a deeper dive into documentation shows a perfect example of the benefits of GitLab: GitHub offers a very limited import capability from very limited sources, the full extent of which are difficult to track down in documentation. GitLab offers clear documentation on how to migrate from 15 other collaborative software development platforms. This type of clear documentation and robust features is very common with GitLab. The lack of such clarity and robust features has been a constant source of frustration every time I deal with GitHub for any length of time. GitHub may have had the first mover advantage, but GitLab has come along and done the same task better for many use cases.

GitLab also is one of the best tools I have use to facilitate the overall software development lifecycle. For relatively small up-front configuration time, productivity enhancements are easily obtained. Its own tools integrate well with each other and flow naturally from one stage to the next. The interface is simple yet provides a lot of options to expand into more complex configurations as desired. I see a lot of potential for enhancing productivity at even a small scale in ways that are appreciated (in my experience) by both developers and managers.

This type of tool also tends to be sticky within an organization. While it is possible to transition to a different platform, a tool such as GitLab becomes so all-encompassing in the software development lifecycle that the enterprise cost to change to a different platform goes far beyond the technicalities of importing a project.

A quick note on repeatability: Could anyone do what GitLab has done? Yes and no. Technically it is possible. But in reality, it is highly improbable and would take years of effort. GitLab has a very smooth interface which also improves over time. Documentation is clear. They have a very good reputation. They integrate with many third party tools. I do not foresee new competition any time soon. Side note: After writing this, I noted that the investor presentation includes this as a point under “Iteration drives innovation”.

My end conclusion is that while GitHub undeniably is a risk for competition, primarily by GitHub, I also see a clear advantage to GitLab. They also seem to better market themselves towards corporate projects rather than relying on brand name recognition of GitHub/Microsoft.

Risks

I do not see many risks to this company.

Competition from GitHub or another competitor is possible yet all indications seem to be that this is so far not an issue.

This company has been publicly traded for less than a year. Too early to judge a lot of finances, but what is available looks hopeful.

I am uncertain how “sticky” GitLab is within an organization. My own experience says it should be very sticky within a company and resist switching to a new tool, but I have learned the hard way that personal experience with a quality product is a poor indicator for judging investment quality. However, the high DBNER and customers still expanding after 7 years on the platform both indicate customers are more likely to stay and expand than to move on to a different platform.

Conclusion

I approached GitLab with a lot of skepticism because they are based a core of open source software, but as I looked deeper I realized the way they have used open source software is atypical and seems to be a strong driver for their current rapid growth.

As a user of the product I am a bit biased in favor of GitLab, but my investment career has taught me to be brutal about anything that sounds good or feels good. Looking at the financial results, I am content with the numbers though cautious simply because of the short track record GitLab has as a publicly traded company.

The company seems to have a very good synergy with a number of current industry trends, in particular remote work, transition to SaaS platforms, and transition to cloud platforms.

Judging by the earnings numbers, current world events do not seem to be hindering expansion.

I like what I see of this company and will be increasing my investment.

If anyone has commentary on all this or opposing views I would love to hear them!

64 Likes

Othalan, I have a question. If almost all software engineers already use and love Gitlab, how much more can it reasonably grow? How many times can it still double its sales? (Data, for instance, on the other hand, can keep growing forever).

I’m asking this out of naivety and complete lack of knowledge and not to put the company down. I hope that it’s a reasonable question.

Saul

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I am a professional software developer and I think I may have a clue based on my experience. Different software companies are still using the traditional license business model. In that model, the company releases their software periodically (normally each three quarters) and they sell licenses for their software to interested customers. Usually, these companies uses internal software development tools (IT infrastructure) that are installed on premise like: git, Jira, Jenkins, …, etc.

Many of these software companies started to realise how Software As A Service (SaaS) is a better business model for many reasons such as: predictability of revenue, visibility on product usage, availability of data that can be used for product improvements, …, etc. They started to transform their business to the SaaS model on what is called cloud transformation. Some companies already finished this transformation like: Adobe (https://www.mckinsey.com/capabilities/mckinsey-digital/our-i…). Some other companies adopted a mix of on premise installation and a SaaS model like MongoDB and its Atlas service.

Many other companies (including mine) are starting this cloud transformation journey. According to that article (https://www.cloudcomputing-news.net/news/2022/mar/15/93-of-i…), 93% of IT industry are adopting a cloud transformation strategy in the next five years. Such transition requires replacing the IT infrastructure and Gitlab comes at service at that point. So to answer your question, if the article referenced above is accurate (I am not sure) then Gitlab still has huge room for growth.

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Saul: Othalan, I have a question. If almost all software engineers already use and love Gitlab, how much more can it reasonably grow? How many times can it still double its sales? (Data, for instance, on the other hand, can keep growing forever).

I’m asking this out of naivety and complete lack of knowledge and not to put the company down. I hope that it’s a reasonable question.

It is a good question and also a confusion that came from my own failure to be clear enough. I should have been more clear that ‘git’ (a piece of software) is only a distraction, but an important distinction to understand the issue at hand, the company GitLab and its competition.

If you want a good comparison, think of a company like BILL. Fundamentally, what they do is track how money moves around. At the center of that somewhere is a database of numbers. But BILL does a lot of other tasks around those numbers needed to support the entire operation of a business.

‘git’ stores the software code, text files, binary files, etc. Everything which defines a project.

GitLab is a tool used by Software Engineers, managers, tech support, scientists, IT, and more, as a platform to coordinate the entire development process of whatever software they are working on.

As for potential market, I believe that the market is not only extremely large but also growing at a very fast rate. Your confusion in this is the version control (git) vs the software development collaboration platform (GitLab). I will try to keep this simple, but please do ask more questions if anything is not clear!

Here is my train of logic:

Every piece of software in the world needs to store software versions. This is a solved problem with no investment growth I know of, but it is also created a new problem: How do you control the quality of the software you create?

In the early days of software, that was handled by a process unique to each company. This developed over time until we have modern SaaS collaborative software development platforms such as GitLab and its competitors.

The idea of the collaborative software development platform is still a rapidly evolving and fast growing need in the world. Early concepts were not only frustrating to use but did not cover most of the needs of current solutions such as GitLab.

What is the potential market audience? Every software project in the world. How many companies create software which needs a tool such as GitLab? I couldn’t even begin to guess but I have no doubt it is a huge number. I also have no doubt that number is steadily increasing every year, probably at a very fast pace.

Most of those companies are using very inefficient processes for the software development lifecycle. Multiple tools that don’t work together, entire departments of a company that are not talking to other parts of departments (but should), specialized software for managers that isn’t linked to the development team, etc.

A tool like GitLab integrates those diverse tools, departments, information flows, etc. related to software development into one system. Much like BILL does for small business finances. GitLab makes the entire process from developer to manager more efficient and integrated, leading to higher quality products at a lower cost.

How many paying customers does GitLab have? I did not find an up to date answer easily, but here is an answer which is a bit dated:

As of June 2021, GitLab had 30 million free users with just 15,356 paying users.

The most direct competition:

GitHub, the most direct competitor has an estimated 83 million total users (February 2022). No statistics on how many are paid customers.

BitBucket, another competitor, has an estimated 10 million total users (November 2021).

This does NOT account for many other platforms are more indirect competitors, nor the many companies which do not use any equivalent to GitLab. This likely accounts for hundreds of millions more potential users.

I am not going to guess at how many free users could be converted into paying customers, nor how many companies might convert to GitLab from a different platform. But even eyeballing those numbers I can see GitLab has plenty of room to grow.

GitLab works on a licensing model of charging a company per user per year.

Why did I even mention ‘git’ which it is a distraction to the above numbers? Because it is important to understand how easy it is for a company to leave GitLab. Converting from GitLab to GitHub might be painful, but is certainly possible as they are both based around ‘git’ at the core. Converting to a platform based on a different version control software immediately becomes far more involved. This is perhaps a distraction from an investor point of view, but as a software engineer it seems to me an important piece of the puzzle.

Am I helping out at all? Please ask if anything is not clear!

29 Likes

Saul,

Just to give a summary thought:

The way software companies are beginning to transition to cloud based SaaS solutions and remote work, I believe that alone potentially gives GitLab a potential for more than 10x growth in the next few years. Ignoring any growth in the number of companies which use software, or converting customers from other platforms. The corporate culture is also realizing how these SaaS tools can save money and GitLab solves a very important need in a way that is liked by all users from developer to manager.

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Saul,

Another reason why GitLab could be a big winner in in the shift to SaaS collaborative software development platforms which I should have highlighted:

As you correctly noted, a very large percentage of people already use ‘git’ in some way for controlling software code file versions. It is probably the clear winner for that task. But not many people use GitLab as a development platform.

The fact that GitLab uses ‘git’ at its core for controlling software versions is important because the actual code and version history can be migrated from another solution to GitLab in seconds.

This means that one of the biggest questions of a transition (code history) is a non-issue. This gives an easy migration path for a very large user base. GitLab also has robust transition tools to migrate from other platforms not based around ‘git’.

This greatly reduces the pain of adopting GitLab once a project needs a SaaS collaborative software development platform.

2 Likes

investowner,
GitLab is not the only Source Code Management software. While the TAM has a huge potential there is also a major competition and GitLab is far from being first.
According to datanyze GitLab have 9% market share and 4th largest SCM software. MSFT with GitHub is larger with 18% market share.

2 Likes

I am intrigued by GTLB but have questions in two areas that I believe are fundamental to understanding the company’s potential. First, I’m unclear about how they arrived at the TAM figure of $40B. What are the underlying assumptions in reaching that figure and are they solid? If the TAM is only $20B (not saying it is or isn’t), how soon would we reasonably expect it to grow to $40B? And how far beyond $40B might it grow?

The second area where I remain unclear is in the opportunities to monetize what they currently do and to innovate into additional areas that could be monetized. The question that brings these two areas of concern together is: If the TAM really is $40B now and if they capture some greater percentage of that market, how does that increase in market share flow to the bottom line?

Dorset, no position but intrigued.

As a retired software programmer/executive, I am not interested in investing in any company making software development tools.

Software developers stay on top of technology probably moreso than in other industries. Some of this is that the developer community is well connected within itself, with lots of blogs and articles and conferences so everyone knows about everything. Another is that, well, it’s software and so it’s easier to migrate onto the latest and greatest. Finally, there are always new software projects and so often one doesn’t bother migrating an older project, but simply starts the new project using a new set of tools. Developers are pretty good at working around the limitations of open source / free versions, even developing add-on tools themselves.

As a result, no company stays dominant very long. I’m not interested in try to catch a short-lived wave of adoption.

41 Likes

Dorset,

The TAM comes directly from the most investor presentation on their website from the most recent quarterly results. TAM listed as $40B, with the source noted as “TAM based on GitLab internal analysis”. Your questions quickly deviate from my investing expertise but I was able to dig up a bit more information:

A quick search led me to the S-1 SEC filing (I believe this is for their IPO?) which contains a lot more interesting detail:

https://www.sec.gov/Archives/edgar/data/1653482/000162828021…

According to Gartner, the total addressable market for Global Infrastructure Software is estimated to be $328 billion by the end of 2021 and $458 billion by the end of 2024. We believe that we can serve $43 billion of this market by the end of 2021 and $55 billion by the end of 2024. We calculated these figures by determining the markets currently addressed by the most common use cases for our platform and summing their estimated sizes as reported by Gartner.

And later on, more detail is presented:

According to Gartner, the total addressable market for Global Infrastructure Software is estimated to be $328 billion by the end of 2021 and $458 billion by the end of 2024. Given the point solutions we replace; it is also helpful to look at segment level market sizes for solutions we supplant. We believe our platform addresses several segments within Gartner’s Global Infrastructure Software Market, which in aggregate equal $43 billion in 2021 growing to $55 billion by the end of 2024. We calculated these figures by determining the markets currently addressed by the most common use cases for our platform and summing their estimated sizes as reported by Gartner. Today, we believe we address $15.1 billion of the Application Development sub segment, $4.1 billion of the Application Infrastructure and Middleware sub segment, and $24.0 billion of the IT Operations sub segment. Based on this data, and Gartner estimates for market growth within these categories, we have estimated that our total addressable market will grow by $12 billion by 2024.

I would guess these numbers include free tier users and/or open source projects which are given a free license to ‘ultimate’ features which are normally paid.

This brings to mind a phrase from the earnings report:

[Sid Sijbrandij] To invite more personas to the platform like Data Scientists, we are also integrating the DevOps process with the MLOps process. We see this as the next big step in consolidating historically separate development workflows.

This implies to me that as GitLab expands its set of features, they are also expanding their TAM.

How fast can they grow and for how long? I try not to prognosticate like that. But I see that in the first year since the IPO revenue grew at 74%. Judging by the comparison to pre-IPO numbers, that is a notable acceleration. That does not sound like a company which is reaching market saturation.

Perhaps someone with more experience could expand on all of this…

2 Likes

Smorgasbord: Software developers stay on top of technology probably moreso than in other industries. Some of this is that the developer community is well connected within itself, with lots of blogs and articles and conferences so everyone knows about everything. Another is that, well, it’s software and so it’s easier to migrate onto the latest and greatest. Finally, there are always new software projects and so often one doesn’t bother migrating an older project, but simply starts the new project using a new set of tools. Developers are pretty good at working around the limitations of open source / free versions, even developing add-on tools themselves.

That is a valid concern. Thank you!

In this case, this may be less of a risk than for most developer tools for two reasons.

GitLab is primarily an infrastructure for the software development process and it can support just about any developer tool. Each tool can be replaced trivially, but an infrastructure that has diverse tools working together smoothly does not come along so easily.

GitLab also goes far beyond the software developer. Reports for managers, test setups for QA, feedback channels for customers or support staff, release configuration management, planning, and more. Not all of those people will be as willing as software developers to jump to an entirely new platform with each new project.

Even so, I’ve added your concern to my own list of risks to watch out for…

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Saul, I have posted that before, but I’ll post again:
I am software engineer with more than 35 years of experience with companies from all sort of industries.
Currently at a startup. I’ve been using GitLab for 7 years now.
GitLab main use case for any software company is source control. It means that it is the vault where all the nest eggs are kept.
It was developed by Linus Trovard the guy that developed Linux.
So the interface to the repository (The server) is well defined.
The GitLab implementation supply the server implementation. It also supplies services like code review and product management.
As you are aware it has a competitor GitHub…
I think it will be relatively easy to migrate from GitLab to GitHub and vice versa.
Lately I can across a revolutionary tool that GitHub developed it is called:
GitHub copilot… (You can read about it as it will take a whole article to describe it).
My suspicion is that GitHub has much more resources than GitLab (It belongs to MSFT now).
If I had to choose now my inclination would be to go with GitHub.
Summary:
GitLab has no real moat.
GitHub has at least one very desirable feature that GitLab doesn’t have…
GitHub has much more resources than GitLab and it can follow the way of Microsoft Word and WordPerfect…
I would stay away.

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As a retired software programmer/executive, I am not interested in investing in any company making software development tools.

The thing is though, that it’s not really a software development tool. It’s a DevOps tool.

This may seem like an unimportant distinction, but deployment tools tend to stick around much longer. They get integrated with everything. It’s much easier to replacement an IDE, a framework, or any other tool used by a single application than the tools you use to build and deploy everything.

I’m not convinced yet from a stock price, I haven’t looked into the numbers yet.

But I’m not willing to exclude it as a “Dev tool” because it’s not really a dev tool anymore than something like Snowflake.

–CH

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Hear hear.

For example, in our AWS environment…
We just finished migrating to React 18.
And wanted to finish off CI/CD (continuous integration / continuous deployment).
Chose Github actions (a feature in github/gitlabs)… three months ago…
after a month of setting it up and using it…
some serious automation flaws…
So Azure DevOps is apparently the new choice (what, @a month later?), much more featured…
which will take a while to implement…
but decision change in 3 months!

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The question of how willing users are to transition off of GitLab is a good one. I don’t have a clear answer. My personal experience and professional concepts get in the way of objectivity.

But as an investor, I am looking at numbers:

DBNER: > 130%
Customers continuing expanding their use 7 years after joining the platform.

That seems to indicate that customers stick with GitLab and expand their use. Good enough for me to give the company the benefit of the doubt while I watch closely what happens over subsequent quarters.

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Folks, from investment thesis perspective the case is not complicated.

Firstly, Gitlab is going after basically “greenfield” business. The main target is Do-It-Yourself DevOps/DevSecOps tools which are obviously inferior to modern tools. In the next few years there will be rapid adoption of either Gitlab or Github platform for many many companies around the world. Here is a good quote from CEO on this point:

"Sid Sijbrandij

Yeah. Thanks for that. We believe that we’re very early in a big market opportunity. Us and our biggest competitor together, we’re less than 5% of a $40 billion market . Gartner said that DevOps platform adoption is 20% now, growing to 60% over a couple of years. And if anything, the need to consolidate, the need to have fewer tools, less integration efforts is only accelerating . Companies can’t afford anymore to spend and solve everything by hiring more people. So, the macroeconomic challenges that company faces only makes it more of an imperative to consolidate, to go to the cloud faster and to embrace platforms like GitLab."

Looks like Gitlab is in a good place on an S-curve in own market and figures from last several quarterly reports support that.

More thoughts on competition vs Microsoft. Crowdstrike has been competing against Microsoft for many years. Microsoft is still the main competitor - especially now, when consolidation of variety of different tools to platforms is ongoing. Nevertheless, both Crowdstrike and Microsoft security business (and other newer generation security businesses) have been growing like crazy. Why? Because they have been replacing legacy tools and the market itself has been growing.

For me it seems highly likely that Gitlab and Github both will be showing very strong growth in the future as they will be eating into this greenfield/DYI business environment because these two are clearly the best tools in this specific segment.

Secondly, it’s pretty much the fact that many companies will prefer to have an independent and vendor agnostic platform like Gitlab vs Microsoft which will definitely be pushing own cloud and other products. So, AWS and GCP environments will be trending more toward Gitlab and not Github. Already now they are cross-selling via GCP and AWS platforms a lot of deals - here is what they said on the last call:

"Brian Robins

Yeah. I would just say that the – on the billing, we had two invoices, one that’s been collected, one that we’ll get any day now. So that’s on the billing that you’ve seen sort of the DSOs tick up a little. And I would just say for the quarter, there wasn’t really anything outside in the quarter that happened that has happened in other quarters. And so, we landed a – we had a record quarter as well with AWS and GCP contribution. And so, once again, another large quarter – the largest quarter in company history of what they contributed as well ."

Me here: Sounds very similar to DDOG, ZS, SNOW and other our names selling via hyperscaler’s marketplaces

"Sid Sijbrandij

Thanks so much. I’ll go first and let Brian add. The most important partnerships for us are the ones with the hyperclouds. And they’re important for us because more and more of the purchasing is happening by these hyperclouds. They’re influential in accounts. They have access to the important C-level people.

We are important to AWS, GCP. We mentioned we won a GCP award because they know if GitLab is in the account, they move to the cloud faster. The fastest way to do the cloud migration is to first get on one platform and then move, not to try to move 10 different point solutions at different speeds. That is way more hassle. So, it’s a partnership that’s very symbiotic . And we’re super excited about the additional opportunities that are in partnering with hyperclouds like that and big partners like IBM that we love to work with."

To me it seems that AWS and GCP is pushing their clients - when such tool is needed - to Gitlab and definitely not to Microsoft product.

To sum-up - the bull thesis looks strong here and competition with Microsoft does not look as a material problem to growth. The numbers from last 3 quarters support the bull thesis.

Long GTLB 10%

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Firstly, Gitlab is going after basically “greenfield” business.

There is no “greenfield” in software development tooling. Everyone is using something they bought or got for free.

The main target is Do-It-Yourself DevOps/DevSecOps tools which are obviously inferior to modern tools.

Huh? NOBODY today is writing their own development tooling. Most developers are using modern, and free, open source tools, such as (for examples) GitHub for free repositories, Jenkins for free CI/CD/DevOPs, BugZilla for bug tracking, etc. If they’re writing anything DIY, it’s merely integrations of these tools with other business tools the company has. No-one writes their own CI/CD environment. No-one writes their own code repository. No-one (anymore) writes their own bug tracking/reporting tool. They take what’s open source first and only if necessary do they modify it. For tools like Jenkins, there are thousands of available plug-ins to help with customization, for instance.

And then if companies want, they can pay for any of a number of available products in the market, including pay for versions of the free tools, and remember pricing for other tools is often not per developer (see JFrog for instance).

I mentioned in my earlier post that this is a fast-moving world where the current “best of breed” changes rapidly and that free open-source tools are the primary backbone for many companies. An example would be how the free open-source tool Kubernetes came on the market and eventually killed the biggest profit center for Docker. Whether this was a total business blunder on Docker’s part (some think Docker gave too much away in their free tier), or an understanding the market better blunder (some think Docker put too much effort to support its own orchestration product Swarm instead of Kubernetes) — doesn’t really matter to my thesis that it’s hard to make money on any kind of sustained time period in this business. Making this even more confusing is that Kubernetes in practice isn’t actually free - it needs to be hosted somewhere in a cloud. Amazon does this, for instance, with its Elastic Kubernetes Service (EKS).

These are complicated products that only highly technical engineers truly understand and use. Those engineers are not loyal to their tools: When an software engineer goes on interviews - or heck just talks shop with other engineers at different companies - it’s considered a bad sign if the engineer isn’t up on the latest development tool to hit the market, and worse if he’s still promoting some few-year old tool from which the “smart guys” have moved on from.

This is not an easy business to be in. It’s tough to compete with free, especially when free is mostly very very good and the customers themselves have the skills to not just customize, but even modify as needed.

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Smorg is correct that SW Dev tools change quickly especially the shiny new free stuff. This is the rule in start ups and small companies.

But in larger development organizations changing tools runs into a lot of organizational resistance and cost. Why? Because you have established tool oriented procedures and training that are institutionalized in the many development and test folk. Do NOT forget the human factor. Small teams fast change, big teams slow change.

Source code management is a bit of rocket science to insure the humans do not screw it up using these powerful tools. You may get multiple code branches that fix issues in different released versions that must be each maintained for different groups of customers. Customers always sandbag on major upgrades and demand patched versions of what they have. Else they have a big qualification effort by their own staff before going operational. And get get multiple new code projects under development that require merging and periodic synchronizations across branches for different teams. And these code releases may require qualification in several platforms and clouds. Having a large distributed team of engineers working in a single branch is an assured disaster. The big projects must be broken down into human manageable pieces. These merging and build activities can be very difficult to resolve conflicts, ownership of the conflict, roll back and recovery. You can see how institutionalized a product such as this can become.

On top of all this, are granulated security controls across different kinds of developers per company team, branch, resident country, contractor, etc. Not needed in small companies, but essential with large teams. Integration with other tools such as make/build systems, ticketing (think Jira), providing test tools (also with version/release code control GITLAB offers), code scanners, and deployment to the customer.

I do not think the smaller companies are going to buy GITLAB, they are going to just use the latest shiniest free one. And yes these tools could organically some day overtake GITLAB (eg Jira 10 years ago). But this will take time. The product from GITLAB looks to me to be very robust and very sticky.

I do not own GITLAB but am considering it if we get a pullback in what I expect to be an ugly October. I still need to think more about the financials and the TAM.

-zane

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I find it ironic that the bull case for Gitlab involves both of these being true at the same time:

  1. Lots of companies don’t change tooling frequently, and so it’s sticky for them.

  2. Those same companies will readily unstick what they’re currently using and migrate to Gitlab soon.

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Interesting point. But my experience is that growing or larger companies want a product that provides a ‘platform’ of services. Companies evolve organically and haphazardly at times and frequently find themselves with a hodgepole of tools that come with various versions and scripts to integrate. And a staff to support all these tools. If they want to move to the cloud or just consolidate tools/staff, they want to buy a robust platform of well integrated and qualified products/services. We see this evolution in DB (SNOW and MBD), security (CRWD), and business management (TEAM and MNDY). Our platform stocks are winning the day.

-zane

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