Gitlab Goes on Sale: The AI Bubble Burst for This Stock

Key Points

• Gitlab's guidance failed to inspire the market, but the price decline and reset outlook have it set up to rebound later this year. 
• The company sustains double-digit growth and is widening its margin. 
• Analysts reaffirm their outperform ratings and set price targets 20% above the new low. 

Gitlab’s NASDAQ: GTLB Q4 results and guidance failed to satisfy the market expectations, sending the stock down 20%. The takeaway is that an AI-fueled bubble burst for this market, but the story is not over. As tepid as the guidance may be, the comps to consensus are overshadowed by sustained high-level growth and margin improvement, with analysts reaffirming their ratings and an outlook for share prices to rebound. 

The share price may wallow in calendar Q1 and Q2, but signs of support are already on the chart, so a deeper correction is unexpected, and a rebound is likely. It will take time, but Gitlab’s share price will recover as the company grows into its valuation and may even set new highs this year. 

Gitlab Fails to Meet Inflated Expectations

Gitlab had a solid quarter and exceeded the consensus forecast on the top and bottom lines, but some details hurt the price action, primarily the valuation.  The stock was trading about 350X the fiscal 2024 earnings estimate and 150X  fiscal 2025’s ahead of the report, and the performance and guidance do not live up to those figures. 

The $163.8 million in revenue beat the consensus, but the 350 basis points of outperformance are not that great given the market. Most AI-related companies outperform by low single digits, and the leaders by more, and growth is decelerating. The 33.3% posted in Q4 is better-than-expected but aligns with the prior quarter, and the guidance is weak. Guidance suggests growth will slow by 500 basis points in fiscal 2025. 

Details that suggest a rebound will occur include the outlook for sustained double-digit growth and widening margin. The company’s RPO increased by 55% on increased subscriptions and licenses driven primarily by large customers. Enterprise-scale clients contributing more than $1 million in trailing ARR are leaning into the DevSecOps platform and have increased their business by 52% YOY. Smaller businesses contributing more than $100,000 and $5,000 are up by 37% and 23%, respectively. 

Margin news is another bright spot in the report. The company improved its margin on top-line growth and penetration. The net retention rate is 130% and is expected to remain strong this year as new products and features are rolled out. The company continues to report GAAP losses but reached cash-flow neutral operations a year ahead of schedule and reported an adjusted profit. The adjusted 8% operating operating margin is up 1900 basis points for the quarter and is expected to remain positive in F2025. 

Guidance Derails the Uptrend in Gitlab

Guidance is the primary cause of the stock price implosion. The company guided for 25% YOY revenue growth but missed the top and bottom lines consensus. Analysts expected to see $0.30 in adjusted earnings this year, and the company forecasted $0.19 to $0.23. The takeaway is that analysts' sentiment was overzealous, and the market reset. The company’s guidance may be cautious, so there is a chance it could improve its outlook as the year progresses. Regardless, sustained double-digit growth and a pivot to profitability is good news for any tech stock. 

Analysts' activity is mixed following the report, with one boosted price target offset by another lowered one.  However, the two analysts making early calls reaffirmed Outperform-equivalent ratings and see the stock trading in the $74 to $75 range. That’s 10% above the consensus target and 20% above the current action. 

The market is down and may have trouble regaining footing soon, but support is present. The market fell to a significant resistance level broken late last year, presenting an attractive entry point for new money this year. If this level continues to provide support, it will confirm a Head & Shoulders Bottom. This bottom has an upward bias with rising support and may continue to complete a reversal. In that scenario, a move back to the $75 level would lead to a new high and an uptrending market.