businessPersonal Finance

Motley Fool: GitLab is a fast grower to buy — or watch

Plus: A primer on exchange-traded funds and this week’s trivia question.

The Motley Fool Take

GitLab provides a “DevOps” platform that helps its customers run software faster and more efficiently — and it’s been growing briskly. In its second quarter, revenue increased 74% year over year to $101 million, beating estimates, and its adjusted net loss narrowed — a sign that the company is moving toward profitability. Management projects 57% to 59% revenue growth (year over year) in the current quarter.

GitLab’s adjusted gross profit margin was recently a fat 89%, representing the portion of revenue left over after subtracting the cost of goods sold. Additionally, its dollar-based net retention rate has consistently been above 130%, meaning that on average, its established customers are increasing their spending by at least 30% annually.

The company operates in a highly fragmented market that it estimates is worth $40 billion, but it owns just 1% of that market currently. That should give it a long growth path, and it’s growing as fast as it can hire.

It’s not a slam-dunk buy right now, though; its stock isn’t exactly cheap, with a recent price-to-sales ratio of around 21. It also has deep-pocketed competition in Microsoft’s GitHub. But with sales growth topping 70% and a large total addressable market to penetrate, GitLab has a lot of upside potential over the long term.

Give it a closer look and perhaps add it to your watch list, waiting for a lower price.

Ask the Fool

From P.N. in Kenosha, Wisc.: What’s a reverse stock split?

The Fool responds: It’s the opposite of a regular stock split, which will increase your number of shares at a specified point in time while reducing their price proportionately.

For example, if you have 100 shares of Scruffy’s Chicken Shack priced at $60 each, a 2-for-1 split will turn that position into 200 shares priced at $30 each. Note that the total value of your holding doesn’t change. Both 100 times $60 and 200 times $30 amount to $6,000.

A reverse split goes in the opposite direction. A 1-for-10 reverse split, for example, will turn your 100 Scruffy’s shares into 10 shares, priced at $600 each — still totaling $6,000.

Reverse splits tend to be executed by struggling companies to prop up their low stock prices, perhaps to avoid getting delisted from a stock exchange that has minimum stock price requirements.

From D.T. in Brimfield, Mass.: When I read articles about companies, I sometimes see very different opinions on various stocks. One expert may say buy, while another says sell. What should I think?

The Fool responds: Unanimous opinions about any stock are rare. Each person evaluating a company can come away with a different opinion about its prospects and estimated trajectory. Even the best investors and analysts are sometimes wrong. They can vary in what they’re looking for in a stock, too. One might be seeking undervalued stocks, while another might think a highflyer is likely to fly higher. Some may be looking for great long-term performers while others want a quick profit. Ideally, gather some opposing opinions, consider their arguments, do your own research and ultimately make up your own mind.

The Fool’s School

It’s worth learning about exchange-traded funds because they can serve your portfolio well.

In a nutshell, an ETF is much like a mutual fund. Investing in one will mean you’re investing in whatever securities (stocks, bonds, etc.) the ETF holds. While most mutual funds are actively managed — with financial professionals deciding what securities to buy, hold and sell — most ETFs are passively managed, aiming to closely match the performance of a certain index by holding the same securities.

Here are some (of many) prominent ETFs to consider: the SPDR S&P 500 Trust ETF, tracking the S&P 500; the Vanguard Total Stock Market ETF, tracking the CRSP U.S. Total Market Index; the Vanguard Total World Stock ETF, tracking the FTSE Global All-Cap Index; and the iShares Core US Aggregate Bond ETF, tracking the Bloomberg U.S. Aggregate Bond Index.

Both mutual funds and ETFs charge annual fees (often called “expense ratios”), and many ETFs’ fees are ultra-low — 0.03% is not uncommon.

While buy and sell orders for mutual funds are settled once a day, after the markets close, you can buy or sell shares of ETFs throughout the trading day, as they trade like stocks. And while mutual funds often have a minimum investment requirement, which can be as much as $3,000 or more, you can buy as little as a single share of an ETF, often for less than $200 — or even $100.

Before buying any ETF, learn exactly what its focus, holdings and fees are. Many broad-market index fund ETFs can serve you well for many years. But there are a few risky kinds of ETFs, such as “leveraged” ones that use debt and sometimes derivatives — such as options and futures contracts — to amplify gains. They can wipe you out quickly, so steer clear unless you understand them well.

Like index mutual funds, index ETFs are among the simplest and easiest investing strategies, suitable for most investors. You can learn more about ETFs at the “Investing Basics” nook at Fool.com and at sites such as Morningstar.com.

My Dumbest Investment

From D.G., online: My dumbest investment was buying 2,000 shares of Amazon.com at around $8 apiece after a stock market crash. I sold my shares some time later, at around $16, roughly doubling my money. I only left several million dollars on the table ...

The Fool responds: Try to comfort yourself with the fact that you did double your money, netting thousands of dollars. It’s surely cold comfort, though, as you did what many, many investors do — selling too early and missing out on phenomenal gains.

It may well have been a very reasonable thing to do, though: After all, you couldn’t know back then just how Amazon would perform in the future. Even if you were pretty sure it would do well, it would have been impossible to predict just how well — or to foresee its buying Whole Foods, having scores of millions of Prime members, becoming a top cloud computing service or expanding into areas such as health care.

If you had found a stock back then that seemed to have a much rosier future than Amazon, selling would have been understandable. Or perhaps you just needed the cash, for a down payment or college tuition payment, for example. Simply selling to net a 100% gain, though, without considering the stock’s value proposition at the time, would have been a mistake.

Who am I?

I trace my roots way back to 1833, when two young fellows opened a drug import and wholesale business in Manhattan. In 1870, I debuted gelatin-coated pills, a highly successful product. In 1957, I was the only national wholesale distributor of liquor. I’ve grown in part by acquiring drug wholesalers. I produced penicillin during World War II. I entered the hospital and surgical supply business in 1965 and sold my huge pasta business in 1983. Today, based in Irving, and with a recent market value near $50 billion, I’m a diversified health care company, serving pharmacies and others. Who am I?

Can’t remember last week’s trivia question? Find it here.

Last week’s trivia answer: American Tower

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