What You Can Learn From GitLab Inc.'s (NASDAQ:GTLB) P/S After Its 27% Share Price Crash

GitLab Inc. (NASDAQ:GTLB) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. Longer-term shareholders would now have taken a real hit with the stock declining 8.1% in the last year.

Although its price has dipped substantially, GitLab may still be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 11x, when you consider almost half of the companies in the Software industry in the United States have P/S ratios under 4.1x and even P/S lower than 1.5x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for GitLab

What Does GitLab's Recent Performance Look Like?

Recent times have been advantageous for GitLab as its revenues have been rising faster than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. If not, then existing shareholders might be a little nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on GitLab will help you uncover what's on the horizon.

How Is GitLab's Revenue Growth Trending?

In order to justify its P/S ratio, GitLab would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 34% gain to the company's top line. The latest three year period has also seen an excellent 266% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 24% each year over the next three years. With the industry only predicted to deliver 15% per annum, the company is positioned for a stronger revenue result.

With this in mind, it's not hard to understand why GitLab's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On GitLab's P/S

Even after such a strong price drop, GitLab's P/S still exceeds the industry median significantly. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our look into GitLab shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for GitLab that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com