It Is Not Too Late To “Git” On Board With GitLab

Key Points

• GitLab posted a solid quarter supported by demand for AI-powered services. 
• The guidance is above consensus and may get lifted later in the year. 
• The analysts haven't said much, but revisions are coming, and they may help this market complete its reversal. 

Unsurprisingly, GitLab NASDAQ: GTLB posted a solid quarter and guided the market higher. The company has been gaining traction, and results from MongoDB NASDAQ: MDB foreshadowed the news. MongoDB said that it was well-positioned to benefit from the rise of AI because of its developer tools, including interoperability with Gitlab. What is surprising is that GitLab’s shares surged 30% in premarket trading. The move was largely driven by short-covering, and short sellers may continue influencing the market. The takeaway is that GitLab shares have finally hit bottom, and the time to “git” on board will be soon at hand. With an addressable market of $40 billion and GitLab with less than $0.5 billion in annual revenue, inventors have quite an opportunity.

“With AI revolutionizing how companies develop, secure, and operate software, we believe GitLab is positioned as the leading AI-powered DevSecOps platform,” said Sid Sijbrandij, GitLab CEO and Co-Founder. “Today, we deliver more AI-powered capabilities to customers than any other DevSecOps platform.

GitLab Raises The Roof For Revenue And Earnings 

GitLab had a strong quarter with revenue of $126.88 million, growing 45.2% compared to last year and outpacing consensus by 760 basis points. The gains were driven by growth in clients of all sizes, with those contributing more than $5K in ARR growing by 43% and those contributing more than $100K in ARR by 39%. This is compounded by a 128% net retention rate showing deepening penetration of existing customers as clients rely more heavily on GitLab services. 

The margin news is also impressive. The gross margin was relatively flat compared to last year and strong at 89% GAAP and 91% adjusted. The impressive news is that the operating margin improved by 1700 basis points due to reprioritization to focus on customer needs and internal efficiencies. The takeaway is that adjusted EPS of -$0.06 narrowed sharply compared to the prior quarter and year, beating the Marketbeat.com consensus by $0.08 or 5700 basis points. 

The best news is that business momentum continues to build, and the guidance was raised because of it. The company expects Q2 and FY 2024 revenue and earnings in a range with the low ends above the consensus figures. This is robust guidance and may be cautious, given the appetite for AI development in the economy. Investors might assume the guidance will be increased later this year, which would be another catalyst for higher share prices.

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The Sell-Side Put A Bottom In GitLab 

No analysts issued an update immediately after the Q1 results. Still, the trend in sentiment leading into the report and the institutional activity is consistent with a bottom forming in the market. On the analyst end, they have the stock pegged firmly at Moderate Buy, and the price target appears to have bottomed. On the institutional end, their activity is strongly bullish, with buyers outpacing sellers every quarter since the IPO and activity in 2023 has picked up. They own about 50% of the stock and buy at a rate greater than 3:1 versus sellers. 

The chart favors a bottom at the $30 level. That is consistent with post-IPO lows and is confirmed by the post-Q1 2024 EPS release. The short interest may cause volatility in the near term, but that should give way to a sustained rally, given the outlook for revenue growth and profitability. If the stock can rise from these levels, the next target for resistance is near the analysts' consensus of $56.60, about 20% above the action.