It’s no longer Hot Summer anything, sadly, as the seasons change. But perhaps we’re in for Warm IPO Autumn.
Rent the Runway, NerdWallet and other companies are setting us up for a busy second half of October. But this week will see the debut of a company worth a multiple of those other venture-backed former startups as GitLab goes public. And the developer tooling company recently turned up the valuation heat.
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This week, GitLab updated its IPO filing to include a higher expected pricing interval. The unicorn now anticipates that it will sell shares in its IPO for between $66 and $69 apiece, up from a previous range of $55 to $60.
That’s quite the jump!
Our task this morning is straightforward: We’re calculating GitLab’s new simple IPO valuation range and working out what the company could be worth on a fully diluted basis. Then we’ll execute some revenue multiples work, hoping to suss out if our earlier estimations of the company’s value are holding up, and what the IPO’s possible pricing says about the software market more broadly.
This is one of those posts that’s only good news for startups and their backers. For the other side of this particular coin, head here. Ready? Into the breach.
What’s GitLab worth?
In its first IPO price range, with 143,534,821 shares outstanding after its offering (inclusive of its underwriters’ option), GitLab was set to be worth $7.9 billion to $8.6 billion. IPO-watching Renaissance Capital reported that at the “midpoint of [its first] proposed range, GitLab would command a fully diluted market value of $9.4 billion.”
Or more precisely, at $57.5 per share, GitLab would be worth $9.4 billion. At $60 per share, that number would scale to $9.8 billion.
Now at $66 to $69 per share, the company’s expected 143,534,821 post-IPO share count works out to a simple valuation range of $9.5 billion to $9.9 billion. Translating the company’s fully-diluted valuation at $57.5 per share to $69 per share, we can estimate that when counting all shares including those that may be exercised, GitLab could be worth as much as $11.3 billion.
I could have showed a little less work there, but I want you to walk along with me as we tinker with the numbers.
Is that expensive?
Let’s find out!
In its most recent quarter — the three months concluding July 31, 2021 — GitLab recorded $58.13 million in total revenue. That works out to a run rate of $232.5 million. At $11.7 billion, GitLab would be worth around 50x its current annualized revenue run rate.
Is that expensive? Only a little. Here’s The Exchange from our GitLab S-1 dive, executed before the company set an initial price range:
GitLab is growing around as quickly as Datadog, Twilio and CrowdStrike, per the Bessmer Cloud Index. Those companies sport revenue multiples of 47.2x, 21.2x and 44.0x, respectively. … Given that GitLab has very strong gross margins, we can discount Twilio’s number and decide that a 45x multiple of the company’s annualized run rate is not insane.
At that multiple, GitLab would be worth $10.46 billion. Which is more than $6.0 billion, so we can see a path for the company to surpass its final private-market valuation. However, we are not saying that the company is worth 11 figures. Investors may decide that the pace of its losses make it less valuable than some of its peers, or that its growth rate is decelerating too quickly to receive a market-leading multiple.
GitLab could price a little bit above what we anticipated, but not by much. If the company prices anywhere but the top of its range, our earlier estimates will look just fine.
So what?
Herein lies the rub: GitLab being likely able to land a top-end SaaS multiple in its IPO is good news for unicorns. The news implies that quickly growing software companies don’t have to debut, and then earn top-end pricing after they start trading; they can just start at the top of the charts in revenue multiple terms.
This is the public-market equivalent of a red carpet:
- Presuming that unicorns with rich valuations are generating the sort of revenue, and thus value, that we’ve been led to believe from high prices and huge rounds.
- Presuming that unicorns with rich valuations have the sort of gross margins that we expect them to have, and GitLab does.
- And presuming that they are not in the midst of a business model switch-up.
But really, if private-market companies are putting up the financial results that their externally verifiable figures (raises and valuations, basically) indicate, it’s the moment to go public.
Prices for public equities are at their second-highest level in recent history, by one broad metric. This is the time.
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