Everyone's Nervous About GitLab. That's Exactly Why You Should Buy It!

One of the most brutally beaten-up stocks in the market this year has been GitLab (NASDAQ: GTLB), whose stock is -- at the time of this writing -- down more than 40% year to date. The development, security, and operations (DevSecOps) platform operator, whose platform is used to securely create and store software code, has been labeled an artificial intelligence (AI) loser, and even sell-side analysts have started to give up on the name.

This could be seen last week when analysts at UBS started the stock with a neutral rating despite hearing no indication of customers wanting to replace GitLab and stable users. However, the analysts said it would be hard to shake the AI disruption narrative until the company began to see its growth estimates revised upward.

Earlier in the month, Guggenheim downgraded the stock from buy to neutral despite expecting the company to grow its revenue by 19% this year and noting the company's very high gross retention rate, meaning very few customers leave its sticky platform.

A stock too cheap to ignore

These ratings were given despite the stock trading at an insanely low valuation of a forward price-to-sales (P/S) multiple of 3 times. This is for a company with nearly 90% gross margins that projected it would grow its revenue by between 15% to 17% this year. In addition, more than a third of its market capitalization (prices multiplied by shares outstanding) is in cash. So, on a forward enterprise value-to-sales multiple (EV/S), the stock trades at only 2 times. That's the low end of a multiple typically given to software-as-a-service (SaaS) stocks with no or declining revenue growth, not one growing revenue in the mid-teens.

In addition, the bearish AI disruption theses fail to take into account GitLab's customer base. GitLab largely serves large customers in non-technology and highly regulated industries like banking, manufacturing, and the government. Its customers generally aren't fast-moving, and they tend to care most about things like security and compliance. Because of this, the majority of its business is on-premises and not in the cloud. This makes AI disruption much less likely.

Image source: Getty Images.

There is an old adage to be greedy when others are fearful, and I think that certainly applies to GitLab's stock right now. The company is deeply entrenched within its customer base, and while they tend to be slow-moving, it still has a big eventual opportunity with its Duo AI suite and shift to a hybrid seat plus consumption model. This is a company that generates strong free cash flow with a pristine balance sheet, and the stock should not be trading at an EV/S multiple of 2 times given its growth and positioning.

Geoffrey Seiler has positions in GitLab. The Motley Fool has positions in and recommends GitLab. The Motley Fool has a disclosure policy.