In this article, I have evaluated prominent software stocks, Gitlab Inc. (GTLB) and The Descartes Systems Group Inc. (DSGX), to determine which is a better software investment.

GLTB shares plummeted recently following the company’s announcement of fiscal year 2025 revenue and profit projections below Wall Street expectations. The company attributed the conservative forecast to cautious spending amidst economic uncertainty.

On the other side, DSGX’s stock reached a new 52-week high during mid-day trading on Thursday after surpassing earnings expectations. The software company posted EPS of $0.37 for the quarter, surpassing analysts’ consensus estimates of $0.30. Its quarterly revenue stood at $148.20 million, exceeding analysts’ projections of $146.62 million.

Before analyzing the stocks further, let us go through the dynamics in the software industry. The dynamic nature of the business landscape is poised to favor the Software as a Service (SaaS) market, with cloud-based solutions enabling agility in adapting to changing conditions.

As a result, the software as a service (SaaS) market is expected to grow to $325.84 billion in 2028, expanding at a CAGR of 6.2%.

Moreover, the software application market is expected to experience sustained growth driven by rising demand fueled by digital transformation across industries, increased reliance on mobile devices for various purposes, and ongoing technological advancements.

According to the Grand View Research report, the global application development software market is projected to reach $733.50 billion, growing at a CAGR of 24.3% until 2028.

Furthermore, artificial intelligence has revolutionized various industries worldwide. The increasing need for enhanced business IoT solutions, autonomous vehicles, and robotics is expected to propel the expansion of the artificial intelligence software market. The AI software market is expected to reach approximately $1.09 trillion by 2032, expanding at a CAGR of 23%. The sector’s tailwinds should bode well for both the stocks.

In terms of price performance, DSGX has soared 4.3% over the past month, compared to GTLB’s 18.8% decline. Over the six months, DSGX has returned 22.7%, higher than GTLB’s 13.8% gain.

However, here are the reasons why I think DSGX might perform better in the near term:

Recent Developments

On January 17, GTLB unveiled GitLab Duo Pro, an add-on priced at $19 per user per month, that was released in February 2024, across all GitLab deployment options. This tool integrates Code Suggestions and organizational controls into a single application, prioritizing privacy and transparency.

Conversely, on February 21, DSGX announced that Ecotape, an Argentine auto parts manufacturer, saw a 30% boost in international sales in 2023 thanks to DSGX’s Descartes Datamyne™, a global trade intelligence solution. By leveraging DSGX’s technology, Ecotape identified potential buyers using commodity-level trading data, expanding their market reach.

Recent Financial Results

In the fiscal year ended January 31, 2024, GTLB’s total revenue rose 36.7% year-over-year to $579.91 million. However, it reported a non-GAAP loss from operations of $1.37 million. Its general and administrative increased 16% year-over-year to $98.76 million. Non-GAAP net income attributable to common stockholders came in at $32.60 million and $0.20 per share.

On the contrary, during the fiscal year ended January 31, 2024, DSGX’s revenue increased 17.9% year-over-year to $572.93 million. Adjusted EBITDA came in at $247.50 million, up 15% year-over-year. The company’s income from operations rose 9.5% from the previous year to $142.85 million. Its net income and EPS grew 13.4% and 13.6% year-over-year to $115.91 million and $1.34, respectively.

Past and Expected Financial Performance

Over the past three years, GTLB’s revenue grew at a 56.2% CAGR. Analysts expect GTLB’s revenue to increase by 26.8% in the fiscal year ending January 2025 and 31% in the fiscal first quarter ending April 2024. Its EPS is expected to gain 27.4% in the current year and 38.3% over the fiscal first quarter (ending April 2024).

Conversely, DSGX’s revenue has increased at a CAGR of 18% over the past three years. Its revenue is expected to increase 10.3% this year ending January 2025 and 10.7% in the fiscal first quarter ending April 2024. Its EPS is expected to rise 15.2% this year and 11.1% in the fiscal first quarter.

Valuation

GTLB’s forward non-GAAP P/E multiple of 241.06x is higher than DSGX’s 50.59x. GTLB’s forward EV/Sales multiple of 11.81x is higher than DSGX’s 11.45x.

Thus, DSGX is more affordable.

Profitability

GTLB’s trailing-12-month negative EBIT margin of 30.56% is lower than DSGX’s 28.36%. DSGX’s trailing-12-month net income margin of 20.70% is significantly higher than GTLB’s negative 73.15%. In addition, GTLB’s trailing-12-month EBITDA margin of negative 29.44% is lower than DSGX’s 40.22%.

Thus, DSGX is more profitable.

POWR Ratings

GTLB has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Conversely, DSGX has an overall rating of B, which translates to Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories.

GTLB has a C grade for Quality. Its trailing-12-month gross profit margin of 89.78% is 83.2% higher than the industry average of 49%. Its trailing-12-month EBIT margin of 30.57% is significantly lower than the 4.76% industry average.

However, DSGX’s trailing-12-month gross profit and EBIT margins of 75.86% and 24.93% are 54.8% and 423.6% higher than the industry averages of 49% and 4.76%, respectively.

Moreover, GTLB has a D grade for Stability, which is justified by its 24-month beta of 2.50. On the other hand, DSGX has a B grade for Stability, which is in sync with its 24-month beta of 0.56.

Among the 132 stocks in the B-rated Software – Application industry, GTLB is ranked #108. DSGX is ranked #7 among 19 stocks in the B-rated Software – SAAS industry.

Beyond what we’ve stated above, we have also rated both stocks for Value, Momentum, Growth, and Sentiment. Get all GTLB ratings here. Click here to view DSGX ratings.

The Winner

The software industry is experiencing growth, driven by the rising dependence of enterprises on software solutions for business operations. Companies like GTLB and DSGX stand to gain from these industry trends.

However, GTLB recently faced a setback as its shares tumbled following cautious fiscal year 2025 projections, while DSGX soared to new heights on the back of stellar earnings.

Moreover, DSGX’s superior profitability, reasonable valuation multiples, and stable beta value make it the preferable investment option over GTLB.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Software – SAAS industry here. Access top Software- Application stocks here.

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DSGX shares were trading at $91.54 per share on Friday afternoon, down $0.05 (-0.05%). Year-to-date, DSGX has gained 8.90%, versus a 8.25% rise in the benchmark S&P 500 index during the same period.

About the Author: Kritika Sarmah

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities. More...

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