Despite some early-in-the-week wobbles, the bulls were able to rally into the close of the week and again tack on gains. For the week the S&P 500 gained 0.8%, the Dow was unchanged, and the Nasdaq rose by 0.7%.
The Stock – GitLab (GTLB)
Why the Strength
GTLB’s story revolves around the fact that, these days, software basically runs the world, and many mid- to large-sized enterprises have big software development teams in-house to improve, tweak, patch and upgrade various codes (not to mention the many firms that are pushing out software to their clients). The problem comes with efficiently developing the software, testing it (for functionality and security) and then sending it out to users; right now, the vast majority of firms use at least two and sometimes up to 10 different systems to help them do all of this.
GitLab has a better way, with a comprehensive platform that tons of clients are adopting because it boosts productivity and reduces software spend thanks to faster coding and planning, automated testing, and with improved security, too. Indeed, the company says customers are seeing cycle times that are seven times faster, while, for revenue-generating apps, the payback on the initial investment for its platform is under six months!
It’s a behind-the-scenes offering for most of us, but the opportunity should be huge, with three-quarters of firms likely to consolidate to a single “DevSecOps” platform (industry jargon) from many point solutions within the next few years—and GitLab is the clear leader, according to industry analysts. Already, more than 50% of the Fortune 100 are customers, and growth, while slowing, remains solid: In Q3, sales rose 32% while earnings of nine cents compared to estimates for breakeven, while many sub-metrics (874 clients with more than $100k of spend, up 37%) were also excellent. Analysts see the top line lifting 28% next year (likely conservative) while earnings continue to lift. It’s a good story.
Technical Analysis
GTLB effectively bottomed out for a year (spring 2022 to spring 2023) before gapping up nicely on its Q1 report in early June. But that led to another multi-month rest period as the stock was capped by resistance at 55. Now, finally, it looks like GTLB is starting to move—shares have risen six weeks in a row, capped by last week’s earnings-induced breakout, with the breakout day coming on nearly 10x average volume (usually a very good clue). Stop — 51
The Covered Call Trade
Buy Gitlab (GTLB) Stock at 60, Sell to Open January 60 Strike Calls (exp.1/19/2024) for $3, or a Net Price of 57 or less
Static Return: $300 per covered call (5.26%)
Breakeven: 57
Covered Call Return (if assigned): $300 per covered call (5.26%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 57 or less. (In this case 60 minus 3 = 57. Or another example is you could pay 59.5 for the stock and sell the call for 2.50, which also equals 57)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
The next Cabot Profit Booster issue will be published on December 19, 2023.
