Gitlab Stock: A Market Leader On Sale (NASDAQ:GTLB)

Just_Super/iStock via Getty Images Solid Q1 Earnings Gitlab (NASDAQ:NASDAQ:GTLB) reported its Q1 results last week with a beat on both top and bottom lines. Revenue increased 33% to $169 million driven by large customer ARR. Operating metrics continued to improve, due to better operating leverage and pricing increases. The company also reached a record $37 million free cash flow. However, the market didn’t like the guidance and the stock declined more than 10%. If we look at Gitlab’s performance over the last few quarters, we can see it is one of the best performing SaaS stocks in the market. The company is executing in a challenging SaaS environment and doesn’t show any sales weakness (unlike its peers). It is recognized as a market leader in DevOps (see below) and has a great product roadmap. The company has also started to operate with financial discipline and has been generating positive cash flow since last year. Magic Quadrant – DevOps (Gartner) Despite solid financial performance and earnings beats, GitLab’s stock price continues to decline. The market is likely pricing in the broader SaaS challenges and increasing competitive risks for the company. However, we believe this setup creates a compelling investment opportunity. GitLab’s market leadership position, strong financials, declining stock price and the strategic importance of DevOps in the industry create an interesting scenario. If GitLab’s market capitalization falls further, we think the possibility of an acquisition will increase. The company currently has an enterprise value of $5.9 billion, which is relatively cheap for a market leader. We think this scenario creates a potential upside for investors. Revenue Performance and NRR Stays Strong Gitlab’s revenue momentum continues to be strong. The company delivered $169 million revenue in Q1, a growth of 33% YoY. The total number of base customers increased by 374 to 8976 and the company added 70 customers to its $100,000-plus ARR cohort (1,025 large customers total). Large customer adoption growth rate was 35% YoY which is very positive. However the new customer adoption rate is significantly lower and is 22%. We think this relatively lower base customer growth rate is due to the intense market competition. Customer growth (Gitlab) Management expects revenue to be between $176 million and $177 million for Q2, representing a 27% YoY growth. Our view is that the guidance is conservative, given the ongoing strong revenue momentum. Instead, our expectation is $181 million in revenue with 30% YoY, which is more inline with the historical earnings averages of the company. Net Revenue Retention (“NRR”) is a key customer metric that we follow. It is to understand how the company is growing its business and expansion potential with existing customers. Gitlab’s 129% NRR is impressive, and shows the strength of its business. Such a high NRR, combined with 33% revenue growth, indicates minimal churn and significant growth from existing customers (see below the NRR trajectory) Gitlab NRR rate (Author) From a market perspective, we believe demand in the market remains strong and DevOps is diverging from the slowing SaaS environment. Companies continue to invest in DevOps due to its role in enabling business transformation and accelerating product innovation. Gitlab is benefiting from this high demand environment as we can observe from its strong revenue performance. Improving Operating Metrics and Balance Sheet The company continues to show operational improvements on a quarterly basis. Q1 non-GAAP gross margin remained very strong at 91%, which is one of the highest in the industry. The company achieved a non-GAAP operating margin of -2% in Q1 2025, vs -12% last year, which is a significant improvement from last year and driven by better operating leverage. Adjusted Free Cash flow Margin jumped to 22% from -9% last quarter. The free cash flow was $37 million, the highest in company history. Operating metrics (Gitlab) The balance sheet is strong; Gitlab ended the quarter with $1 billion in cash and $0.37 million in debt. Gitlab has a healthy balance sheet and the necessary cash to support its growth initiatives. Attractive Valuation Gitlab was an expensive stock land traded at a median EV/S multiple of 18x for the last three years (see below). Gitlab EV/S (Seeking Alpha) However, the current forward EV/S sales multiple of 8x is a significant discount. Its rare to find a market leader SaaS company with 30%+ growth, and a forward sales multiple below 10. We believe the stock is undervalued. Valuation grades (Seeking Alpha) Risk: Competitive Landscape According to Market.us, the DevOps market is expected to grow at a 21% CAGR to reach $57 billion by 2032, due to high demand for agile development and digital transformation initiatives. Also, Gitlab is sizing the DevOps market as $40 billion as per their internal analysis. DevOps Market Size (market.us) The DevOps market is very competitive, and Gitlab faces competition from multiple fronts: Established DevOps Players: Atlassian and Github (Microsoft) are the top competitors of Gitlab. They have the most competitive offerings and largest customer bases. Hyperscalers: Microsoft, Amazon, and Google are leveraging their large cloud ecosystems to win DevOps market share. Emerging AI Entrants: AI is bringing new players into the market, with very cost-efficient and innovative solutions,. Adjacent Market Expansions: traditional SaaS players are having growth challenges and expand their offerings into the DevOps space (e.g. monday.com) In the long term, we see some potential risks for Gitlab as the company might not be able to sustain its competitive advantages in such a fierce environment. Its differentiating features could potentially be matched by larger competitors as they have greater resources and broader portfolios. This scenario has played out frequently in the industry. Conclusion GitLab has developed a great DevOps platform, and is recognized as a leader in the DevOps market. The company has many strengths including 30%+ revenue growth, expanding margins and positive free cash flow. Despite these positives, the stock has failed to respond to any good news, resulting in a 40% decline over the past three months. By looking at the price action, we believe the market is pricing in GitLab’s competitive concerns and the broader SaaS slowdown. These challenges are real, but we also see a possible upside scenario for the company driven by market dynamics. As the stock price drops further, we believe that a buyout possibility increases. We rate Gitlab as a Buy.

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