Motley Fool Hidden Gems Investing - Did We Just Hit The Bottom?

Episode Date: November 10, 2022

A lower-than-expected CPI number sent stocks soaring. (0:21) Jim Gillies discusses: - Why he believes the reaction on Wall Street could signal a bottom for stocks - Bumble benefitting from today's market rise - How, after a "busted IPO, Bumble appears to be a real business trading at a more reasonable price (15:47) Jeremy Bowman talks with GitLab CFO Brian Robins about how his company is helping other companies develop software, and the trade-off between growth and profitability. Companies discussed: BMBL, MTCH, GTLB Host: Chris Hill Guests: Jim Gillies, Jeremy Bowman, Brian Robins Producer: Ricky Mulvey Learn more about your ad choices. Visit megaphone.fm/adchoices

The 2026 Chevrolet Equinox, awarded the most dependable compact SUV in the U.S. by J.D. Power, is designed for your every day. And with available all-wheel drive, you can handle your to-do list with total confidence. Start your build at Chevrolet.ca. Details at JDPower.com. You ever have one of those days when every traffic light you hit is green? It's kind of like that, only for investing. Motley Fool Money starts now. Chris Hill. I'm Chris Hill. Joining me from the Great White North, Mr. Jim Gillies. Thanks for being here. Jim Gillies. Thanks for the invite. It's not very white this morning. We're still in the last throes of autumn, where I am at least.

The snow is coming. It's already landed in Alberta, but here, it's a very nice day, Chris. You know where else it's a nice day? On Wall Street. I was going to say, practically everywhere on Wall Street. It's a great day for investors, because the Consumer Price Index rose just 0.4% for the month, 7.7% for the past 12 months. Both those numbers lower than expected. And investors are having a party, Jim. The S&P 500 is up 4%. The Nasdaq is up nearly 6%. percent. We were chatting before we started recording. You think this could be a sign? I absolutely think this could be a sign. Well, anything could be a sign, but yes,

I do think this is a sign. We are going to fly the risk-on banner. It is here because because this is the first real hint that inflationary forces are starting to subside. Now, what does that mean? Well, interest rate hikes have been doing what they are designed to do. Certainly, the quantitative tightening program is ongoing, I believe. I'm not following along terribly closely, but I know I've been reading things that they actually might be going too Far in that, that's selling bonds into the market rather than buying them under quantitative easing. But rates, the thinking goes, if rates have indeed tamed inflation, then we won't need as many rate hikes going forward, which means the unrelenting pressure on stock valuations,

stock prices, asset prices and interest rates are inversely correlated, or discount rates when you're looking at stocks are inversely related. So, lower rate hikes or even no rate hikes translates to no further stock price falls in aggregate, thinking goes, and I can't speak for individual stocks, and possibly a time for stocks to go up. So, this is being rejoiced. My take on it is, these CPIs, they really like to get revised, they revise them a month and three months later. So, I'm not going to be the unfettered flying of the risk-on flag here. However, I think the takeaway is, if this CPI number is good, if everything looks indeed good, then from a market perspective, a real good chance the bottom is in. Now,

that does not address the possibility of recession, although I've been in the skeptical camp of How recessionary are we going to get? There's been a lot of really good corporate earnings reports this quarter, frankly. I know it doesn't seem that way sometimes because the ones that stink up a joint tend to get all the attention. I think it's fair to say that this earnings season has been, on the whole, better than expected. I think there was a lot of fear and fear slash resignation going into this earnings season, just like, oh, God, is going to be terrible. Let's just get through this." There have been some nice surprises. There have been a lot of nice surprises. The other thing is, I'm generally not a macro guy,

but that said, I guess we're dabbling in macro right now, so I might as well throw it into the ether. The macro is the reason that they're throwing a party on Wall Street. So yeah, today, we're macro people. You know, it's real hard to have recessions with the employment numbers we've been having. And yes, I understand that various tech companies are laying folks off, not just Twitter. I understand that there's kind of a lot of job pressure on what I'll call technology space workers. But I don't think you're seeing that in the industrial space. You're certainly not seeing that in the energy patch. I don't think you're seeing that in a lot of the day-to-day

9-5s out there. I still think the employment picture looks pretty good and recessions generally have to weigh heavy on job numbers in order to actually gain traction. I hope I'm sounding a note of cautious optimism across various places. Again, individual stock prices can go many different ways. But I think in aggregate, I think things look pretty good. Let's talk about an individual stock price moving in different ways because shares of Bumble were down 15% before the market opened because Bumble's third quarter revenue was lower than expected. Their guidance for the current quarter was lowered. Yet the stock is in positive territory. I'm assuming that's due to the CPI. But this is one of those businesses I think you

and I have both watched for a while with interest because it's in an interesting space. It's the dating app for those unfamiliar. They are going up against a pretty formidable competitor in Match Group, which has such a huge market share with all of the different brands under the Match Group umbrella. After a wonderful debut, what, 18 months ago? Boy, they timed that IPO spectacularly. I was just going to say, say whatever else you want about Bumble's business, about their management, they timed their IPO wonderfully going public in February of 2021. They did, which is practically the peak for what I'll call sassy, that's the software as a service, sassy, techie, growthy names. February 2021 was the absolute peak, and then you can go

track all those types of companies and see what they've done. Probably the broader market has been down for about a year since about November of 2021, but really, the software things peaked at that time. There was Bumble IPO-ing right in the middle of it. I think Bumble offers a lot of really interesting lessons. But always remember, an IPO, you are buying something that the people who know it best in the world are selling. That's any IPO. Now, is it a move to cash out for a founder? Is it a move where the founders are raising capital, take the business to the next level. Those are both perfectly valid reasons to IPO, but you should always have a little bit of skepticism when it comes to IPOs. I have a rule that

I try to avoid IPOs for at least a year. I want to see how they're going to behave publicly. I want to see if the projections they put in their roadshow presentations actually pan I've got a few names I could post up for you. One of my favorites is a long-running retailer in Canada that, when it was under private equity, it was running at about 3% to 5% revenue growth, but then magically on their roadshow to IPO, to re-debut, magically they were going to do 14%, 16% annualized revenue growth going forward after the IPO. I'm like, no, it isn't. Funnily enough, they haven't, and the stock's down 90% from its IPO, because that was the type of IPO where it was private equity getting out. That wasn't Bumble. Bumble is, from what

I understand, I don't know the full details, but from what I understand, the founder of Bumble came out of Match Group, a much larger competitor. Bumble is a different style service, basically puts the control of contact and messaging in the hands of women rather than men. As a man who met his significant other on one of the Match Group websites many years ago, I feel that's a good idea, but I'm not in the market for a Bumble right now anyway. Sorry, my dog is dropping things in here. Chris Hill Oh, I thought your dog was just laughing. No, she's literally dropped a bone on the hardwood floor. Thanks, dog. I actually think Bumble has a good brand.

I think Bumble has an interesting niche. I think it's a niche that Match can probably replicate without too much effort. They already haven't. But I think it's something that, certainly, if you've heard some of the horror stories in certain online dating scenarios. I happen to think this is a good idea and their innovation is a good idea. But because you like a business, the lesson I would suggest is because you like a business, it doesn't necessarily mean you should like the stock. The story of Bumble is the IPO in February 2021, the IPO price is set at $43, which was actually higher than the price they originally wanted. Even that wasn't enough, the stock went stupid on day one, closed at $76. I'm

not sure it's ever closed that high again. Here's why I say take a year. A year after the IPO, Bumble is down 63%. Yeah, it's fallen another about a quarter since then, but at least you've spared that first sickening plunge. If you want to play lottery ticket games on day one and try to buy and sell, fine, but that's not investing, that's just playing games. But that money spends the same as money earned from the most well-thought-out investment in Berkshire Hathaway. But valuation as well is something I want to show here. Valuation matters. I know I'm not one of the cool kids when I say that. I know we periodically go through periods of the market where you could pay anything you want. Think of the nifty 50 in the 70s, think of the tech bubble in the late 90s,

early 2000s. Think of, frankly, the SaaS names in 2020, 2021. Valuation just gets forgotten. Usually, if you try to challenge people with that, it's like, well, I'm a long-term investor and thinker. It's like, I don't know, man, Intel and Cisco are still down 22 years later from the tech bubble. I don't know how long-term you are, but that's pretty long-term. From a valuation perspective, Bumble at its IPO is valued at over 15X revenue, 82X EBITDA, 266X price-to-earnings. All I would say is, do you have any idea what the growth numbers Bumble has to put up in order to justify that level of valuation? High, by the way, and they've done fine, actually. But today, Bumble is down, as of today, Bumble is down over 72% from its IPO price. Today's

valuation is instead of 15 times sales, it's about 4.5 times sales. That multiple is compressed by 71%. Instead of 82 times EBITDA, it's now being valued at about just shy of 16%, that's an 81% compression. The PE has gone from 266 down to 13, 95% multiple compression. Now, I don't know what happens from here for Bumble. But I guarantee you that scale of multiple compression will not repeat. Or if you'd like to make the argument why Bumble will trade at less than one times earnings, please, by all means. The multiple compression has happened. I can't help you if you bought the IPO, but looking at it today, the valuation looks much more reasonable. This is a business that is produced that has grown, I think it's 16%, 17% in the last year, about 19% in the last two years,

a top-line growth that is. EBITDA has roughly followed, but it's a real niche producing real cash flows, growing cash flows, and you can now look at it, what's a cash flow-based valuation look like? Like I said, good niche with the female-centric, female-driven customer model, like that. There's some warts on the business. There's too much software company or tech company, too much stock-based compensation. That happens pretty much everywhere in this space. I was going to say, that's kind of table stakes, isn't it? It kind of is, yeah, but it doesn't mean you have to pay for it. But you have to build it into your models. The returns on capital haven't been terribly great, so they might be over

capitalized. They're still very much a second place to the much larger match group. In fact, I would think probably a good exit might be a buyout by Match Group. But like I said, the founder of Bumble, she was at Match, I believe with Tinder. And I don't know the story. I've heard rumors, but I think there's some bad blood there. So, I'm not sure that Bumble would willingly be acquired by Match. And I believe the founder-CEO of Bumble has voting control such that she could just veto any overtures, hostile, friendly, whatever. There's not an obvious near-term exit if they wanted to sell the business to the largest logical acquirer, but maybe private equity comes at them. But I like looking at IPOs,

what are called busted IPOs, a year, two years after they come out, when all of the excitement has just been washed away, people kind of go, ugh. And you can say, okay, is this a real business? I obviously think it's a real business. Is it a real business at a reasonable price? It's certainly at a much more reasonable price than it was. And so, I thought, on a day when everyone's chasing pretty much everything. Again, this was down in the pre-market, as you said. This was the one that I gravitated towards going, this could be an interesting story and something probably worth digging into more. That was before the CPI print made us buy everything in sight. But no, I thought this was interesting.

Chris Hilliard. Tim Gillies, great talking to you. Thanks for being here. Thank you, Chris. GitLab's revenue year-over-year is up 74%, but like many other high-growth tech companies, its stock has taken a hit in 2022. Motley Fool contributor Jeremy Bowman caught up with GitLab CFO Brian Robbins to talk about how GitLab helps other companies develop software and the trade-off between growth and profitability. Maybe we can just start there. So what is DevOps? And maybe explain it to us like we've never heard the term before. Yeah, absolutely. It's easily explained with an analogy. So let me start with an analogy. Before the iPhone and I would travel, I would

literally pack a Walkman so I could go run in the park. I'd pack a camera so I could take pictures. I had my Garmin GPS in case my map quest that I printed out didn't work. I would literally take a duffel bag of electronics. Then came the iPhone. It was a single application that brought all that together for a terrific user experience. GitLab is a leading DevSecOps platform. And we basically bring all that together for developers to create software. And so it's a single application. It's the most comprehensive platform that allows your developers, the security individuals and operations people all to work at once to create software. So we produce software better, faster, cheaper, more secure. So it sounds like GitLab or your DevOps

platform is replacing a lot of individual solutions. Is that fair to say? 100% correct. When you deploy GitLab, because it's an end-to-end platform, you can replace a lot of point solutions. And that's why Forrester actually did a report on the company and the payback for three years was a 407% return. And the number one thing that companies can do is reduce point solutions. Number two is they don't actually need those teams to actually orchestrate all those point solutions and maintain those. Third, the developers are way more efficient because they can produce software a lot faster. And fourth, to the extent that the application is revenue producing, you actually get that app out in the market quicker. And so you get revenue faster.

So you guys have been a pretty fast growing company. Um, I believe that your revenue grew 74% in your most recent quarter. Um, so what, what do you see as, as your growth opportunities going forward and what's driven growth for the company historically? Yeah. Great question. You every company has become a software company, regardless of geography or vertical. And since we enable companies to make that software, uh, like I said, better, faster, uh, cheaper, more secure every, a lot of companies have used us. And so, you know, we have approximately 60% of the fortune 100, you know, around 25% of the global 2000 and people are using the platform to create their software, uh, to get out to market quicker. You know, an interesting stat is, um,

you know, the company's about 10 years old, a little over 10 years. And, you know, we started selling into the, you know, selling the software about seven years ago, cohorts from seven years ago are still expanding with us today. Cohorts from six years ago are still expanding. And so we are barely penetrated in this really, really large market. We believe that the total addressable market for our products is about $40 billion. And, you know, this year, you know, at the mid point of guidance, we'll do a little over 400 million. So we're barely penetrating a really large market. And so, um, like every company, you know, is, uh, should use our product, uh, to create their software. Right. Yeah. Something I learned too about GitLab. That's, that sounded

interesting. A lot of software companies are focused maybe only on the enterprise level, you know, the largest companies out there, but it sounds like anybody can, even one person can, can sort of sign it, sign up for GitLab and then start, start there. Absolutely. We have a free product, um, and we have about 30 million registered users. And so there's a number of people, either educational, not-for-profits, individuals who use it, just do their own coding. But when you sign up for the paid product, whether you're a shop with five engineers or 5,000 engineers, it's the exact same product. And so we don't customize it for any of our customers. Everybody gets to use the platform, the GitLab platform to make software.

Imagine that makes it easy for companies to scale up with it as well. Absolutely. You know, any company, especially in the public markets, faces competition. So how do you see the competitive landscape for GitLab? Who would you say are your top competitors? And how do you think about your competitive advantage? You know, it's funny. The main competition for us is the point solutions that we talked about.

And we call that DIY DevOps, do-it-yourself DevOps. And basically what companies are doing is they're buying point solutions in every stage of the software development life cycle, and then pulling those together, um, with bubble gum and bail wire to basically create a platform like experience. So when, you know, for the last several quarters that the numbers have been really consistent. So in about 50% of the deals that we're in, we don't see any competition from a name competitor standpoint, the largest name competitor, we only see in about 20% of the deals and our win rate is almost identical, whether they're in the deals or not in the deals. Um, and so, like I said, it's a really enormous market,

about a $40 billion TAM. Uh, we're just getting started and it's super exciting. So when you, when you say 50% of the deals you're competing for, you're, you're not seeing direct competition. That's your, your, uh, you're facing off against those point solutions. Is that they're making software today, but it's unknown to us that any, anybody's in the deal. Cause they're talking to us and it's not like there's a competitive RFP out there. And so when you go through all the Salesforce notes and about 50% of the deals, there's no noon competition there. And so they currently have probably the DIY do-it-yourself DevOps, where it's a bunch of point solutions that they've put together. What kind of feedback do you get from those

kinds of companies then if they're only used to working with point solutions? You know, it's an evaluation. We try to remove the friction out of the sales process on both the buy and sell side. And so whether you buy our self-managed product or a SaaS product, we charge absolutely the same. Uh, we only have one price for premium and one price for ultimate, and then we have our free tier. So we only have two prices. Uh, so when you're consuming the product, we want to try to take all the friction out to make it easy. When we're selling the product, we're doing the same thing as well. And so we aren't trying to compensate our sales team on selling ultimate versus premium or selling SaaS versus self-managed. We go into a customer

and first identify what their problems are. And then the biggest thing that we want to really do is get time to value and drive business outcomes. If we do that, and we know this from historical practice, those customers will continue to expand with us and be with us for a long period of time. As far as, you know, and for, especially in the software sector these days,

and, you know, valuations have come down and there's, I think there's a debate in the market going on between growth and profitability, and which is more important or what, you know, how to, what's the proper way to balance it. So, so I'm curious that GitLab, how do you think about profitability and, and, or, or what do you see as maybe the proper balance of investing and growth, but also showing investors, you know, profit potential? Yeah, absolutely. So, so GitLab, yeah, I've been here, I just had my two-year anniversary

and I was thinking about, I get asked this question periodically. And so I was thinking about, you know, the best way to answer it, to convey the message to the investors. And since I've been at GitLab, there's really been three discrete phases that I can identify at the company. And so right when I joined, we're doing this, we launched a secondary on NASDAQ private market and sold roughly about $200 million worth of stock for team members. And we had a couple hundred million dollars of cash on the balance sheet. That was way oversubscribed. We could have taken some primary, but we didn't. That was phase one. Phase two was going public. And so we went public. Um, we just had our one year anniversary of being a public company. So it was about a year

ago. And, um, we rate, we had roughly a billion dollars cash on the balance sheet, October of last year, revenue multiples, really, really high. And people are saying revenue, revenue, revenue grow at any cost. Um, and then phase three is today's market, right? Revenue multiples have come down. All companies are saying cash flow break even, cash flow break even, cash flow break even. Throughout those three discrete phases, the messaging that Sid and I have delivered to investors has not changed 1%. We said the number one thing we want to do with the company is grow, but we'll do that responsibly. And so every quarter since we've been a public company, we've increased the operating leverage in the business and have delivered improving unit

economics while still growing at really, really high growth rates. And so, you know, I'm really happy to say like in the two-year period, the messaging has been completely the same. The market has really turned, but we haven't, we have not operated differently with almost a billion dollars on our balance sheet or $200 million on our balance sheet. We have a long-term operating plan that we continue to drive towards and really happy with the performance that we delivered last quarter and what we continue to deliver. It sounds like your, your unit economics have steadily improved over, uh, at least in your public history. Is that, is that correct? Absolutely. A hundred percent. We, uh, you know, just last quarter that we reported second quarter,

you know, second quarter last year, we did roughly 58 million in revenue. We did 101 million in revenue this past second quarter. So we added $43 million of incremental revenue and did that at the same absolute dollar loss, which drove about a 1500 basis point improvement in operating margin. And so super happy, you know, even in these markets to deliver those results. But that's the key of what GitLab does. It's a mission critical software package that helps any company create software. And so really fortunate to be where we're at. And as I talked about, one of the reasons why I joined GitLab was because the tailwinds, you know, we're in an industry now where, as I said earlier, every company has become a software

company, so we're very well positioned. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow. Thanks for watching!