Written by Norman Isaac Mwambazi

GitLab exceeds IPO target price, value estimate; Is it overpriced?

On Tuesday this week, we reported that GitLab Inc, an all-remote software company that designs a “DevOps” software platform that …

On Tuesday this week, we reported that GitLab Inc, an all-remote software company that designs a “DevOps” software platform that allows companies’ IT, security, operations, development, and business teams to simultaneously collaborate on projects was slated to make its IPO debut this week. The company, which had set the price target for its shares to be between $66 and $69 each, for a total of 8.4 million shares, revised that price when they went on to the market yesterday, Wednesday, October 13, 2021, after the closing bell.

Instead, GitLab along with co-founder and Chief Executive Officer (CEO) Sytse Sijbrandij issued a total of 10.4 million shares with each going for $77, something that took the company’s valuation to more than $12 billion after raising $801 million at the IPO. Before this, GitLab had anticipated raising over $580.98 million, something that would have taken its market value to $9.87 billion. It is worth noting that the initial price of GitLab’s shares for the IPO was between $55 and $60 each, according to the documents the company filed with the Securities and Exchange Commission in mid-September. GitLab CEO Sijbrandij had planned to sell 1.98 million shares worth $152.46 million at the IPO price of $77 for each share.

Based on outstanding shares listed in the company’s S-1 documents to the SEC, GitLab has a market value of $11 billion for a share price of $77. However, the company has a fully diluted market capitalisation of more than $12 billion if we factor in employee stock options and restricted stock units.

Early investors in GitLab, who have voting significant voting power include Sijbrandij himself (16.7%), funds and affiliates of August Capital (11.3%), Goggle’s parent company Alphabet Inc.’s (ticker: GOOGL, GOOG) venture capital GV 2017 (6.7%), Iconiq Strategic Partners (11.7%), and Khosla Ventures (14.3%).

GitLab said that they have an estimate of 30 million registered users and more than 1 million of these are active license users. The company has an active community of more than 2,500 contributors on its software development lifecycle platform, and it employs 1,350 people scattered in 65 countries all working remotely. Notable GitLab customers are multinational investment bank and financial services company Goldman Sachs (ticker: GS), Swiss multinational investment bank and financial services company UBS Group AG (ticker: UBSG), German multinational tech giant Siemens AG (ticker: SIE), an online employment marketplace ZipRecruiter Inc. (ticker: ZIP) among others.

GitLab made sales of $152.2 million and a loss of $192.2 million in 2020, compared to sales of $81.2 million and a loss of $130.7 million in 2019. In the first half of the 2021 fiscal year (H1 FY2021), the company reported sales of revenue of $108.1 million and a loss of $68.1 million higher than the figures reported in the same half last year ($63.9 million revenue, $43.5 million loss).

According to the documents filed to the SEC, GitLab will use all proceeds from the IPO as working capital for the company’s business operations as well as financing corporate purposes. GitLab has been in the shadows of its main competitor GitHub that is owned by Microsoft Corporation (ticker: MSFT), so it sees the public listing as a means of increasing its visibility in the public, according to its prospectus.

With Goldman Sachs, Bank of America Corporation (ticker: BAC), and JPMorgan Chase and Co. (ticker: JPM) acting as underwriters for GitLab’s IPO, the company’s shares will start trading today, Thursday, October 14, 2021, on the tech-heavy Nasdaq Global Market under the ticker symbol GTLB.

Is GitLab overpriced?

From the company’s financial report, it is clear that GitLab has been struggling in the past two years, reporting losses in millions of dollars, something that Wall Street veteran and corporate finance expert David Trainer referred to as the “worst-in-class fundamentals.” In his note to Forbes, Trainer argues that GitLab’s IPO share price is way overpriced and that investors should not expect to make a big killing from GitLab. He lists his reasons, of course.

Trainer believes that GitLab’s share price should be $5 each, which is some 91% below the midpoint of what it is going for, that is $77 each, and this is because although the company values the Total Addressable Market (TAM) of its products and services at $328 billion in 2021 and expects it to grow to $458 billion in 2024, GitLab can only serve $43 billion of the industry in 2021 and $55 billion by the end of 2024. This means that the company’s share of this large market is as little as 0.5% in 2021.

Trainer also said that GitLab, which has approximately 21 months of cash to cover its current cash burn rate, the company desperately needed to go public to raise capital and enough cash to save the company from going bankrupt. The company has so far raised $801 million in its IPO but for how long will investors bail it out?

Another reason Trainer pointed out in his argument about GitLab’s overpricing is the view that its Freemium business model has not been profitable enough for the company. A freemium model is where a company attracts users by providing a free version of its software to turn these users into paying subscribers for the company. Of the 30 million users GitLab reported in its filing, only 15,356 of them are paying users, which represents less than 1% of the company’s user base, and this is below the industry average freemium conversion rate of 2 – 5%.

With GitLab’s competitors being more profitable, industry giants like Microsoft, Amazon (ticker: AMZN), Oracle Corp (ticker: ORCL), Atlassian Corp (ticker: TEAM), and International Business Machines (ticker: IBM), the company is like a featherweight boxer in the ring against heavyweights with a string of knockouts to their names.

According to market data provided by the International Data Corporation, Microsoft Azure and Amazon Web Services (AWS) held 13% of the revenue share in the public cloud services market in 2020 and when you factor in other giants like Salesforce (ticker: TEAM), Alphabet, and Oracle, they hold 38% of the public cloud services market share. Now it is worth noting that these companies have been consecutively posting profits in the last two years or so, seen their stock rise to record prices, something that GitLab is yet to achieve.

Trainer mentioned other reasons like GitLab’s decision to scale down on Research and Development (R&D) compared to its competitors, as well as its use of substantial open-source code in its products.