GitLab Crashes On Guidance; Analysts Defend

Key Points

• GitLab crashed on slowing growth and weak guidance. 
• Analysts are lowering targets but view this stock as a Buy.
• Upside could be worth 50% even at the low end of the expected range. 

GitLab NASDAQ: GTLB fell more than 30% at the open due to weaker-than-expected guidance, but the analysts have come out to defend the stock. While the guidance was weak, it was only moderately weak, and at least one analyst thinks the outlook is cautious. Evidence within the Q4 results shows momentum is building due to the company’s utility. GitLab's platform allows users to consolidate and unify workloads in a way that helps drive lower costs. Given today’s highly inflationary environment, that is more than desirable. 

Analysts See Double-Digit Upside For GitLab 

Analyst Koji Ikeda of Bank Of America reiterated a Buy rating but lowered the target to $50 from $75. Mr. Ikeda thinks the guidance is soft, noting no price increases were mentioned. The problem is that growth is slowing to the mid-30% range, contrary to management’s forecast for 40% growth. Mr. Ikeda wrapped up his note by stating the weak guidance should lead to a cycle of “beat-and-raises,” assuming the macroeconomic conditions don’t worsen.

The 12 analysts rating GitLab have it pegged at a Moderate Buy, which is unchanged after the Q4 results. At least 3 have come out to lower their targets, but none have downgraded the stock. The new Marketbeat.com consensus is hovering near $63, which implies about a 100% of upside for the stock, and even the low price target is higher than the current price action. The low target is freshly set at $45 and comes from the Royal Bank of Canada. 

Institutional buying is strong in this name and should be expected to continue. The institutions have purchased shares in a ratio of 4:1 compared to sales and have holdings up to 49% of the stock. They’ve netted about 37% of the stock in the last 12 months, putting them on pace to own more than 75% of the company by the end of the year. Given the massive decline in share prices, their activity may increase soon. 

GitLab Has Strong Quarter, Growth To Slow 

GitLab had a good quarter, but slowing growth on top of soft guidance weighs on share prices. The company reported $122.9 million in revenue for a gain of 58% YOY that beat consensus by 300 basis points but is overshadowed by the outlook for growth to slow to only 33% in 2023. The guidance calls for YOY growth but not sequential growth, where the potential catalyst for higher prices lies. 

This company has been growing sequentially since the IPO and released internal metrics supporting another quarter of sequential growth. Client counts grew by 42% to 62%, with the highest tier, those contributing more than $1 million in ARR, leading the way. This is coupled with a 133% recurring revenue rate which suggests growth is coming from client adds and expansion of services to existing customers. In this light, the guidance may be weak and substantially so. The question that needs to be answered is when will profits come? Execs are still guiding for losses in 2023. 

The Technical Outlook: GitLab At Rock Bottom

Price action in GitLab has fallen to rock bottom at the post-IPO low. This price may be the floor for shares, but there is a risk of another decline. If the market can’t hold above $30, it could slip into the teens before it hits bottom.