GTLB - GitLab rises even as Needham cuts on worries of 'severe demand headwinds'

GitLab ( NASDAQ: GTLB ) shares rose nearly 2% in early Friday trading even as Needham downgraded the DevOps software company, citing worries that the company's recent layoffs speak to "severe demand headwinds."

Analyst Mike Cikos lowered his rating on GitLab ( GTLB ) shares to hold from buy, pointing out the company's layoffs are unlike other companies that have lowered headcount.

"Said plainly, management is not just throttling back hiring, but the workforce reduction indicates the rate of deteriorating demand was acute (especially in light of the Subscription model's visibility)," Cikos wrote in a note to clients.

Earlier this week, GitLab ( GTLB ) Chief Executive Sid Sijbrandij said the company would lay off 7% of its employees, or 114 employees, due to a "tough" macroeconomic environment.

Sijbrandji added GitLab ( GTLB ) customers are "taking a more conservative approach to software investments and are taking more time to make purchasing decisions."

GitHub, a GitLab competitor owned by Microsoft ( MSFT ), also is reportedly letting go some of its workforce and going fully remote.

Cikos explained that GitLab ( GTLB ) is seen as a growth stock by investors, with revenue growing 69% year-over-year in its most recent quarter, while its operating margin was -19.1%. The layoffs could mean that the company is focused on profitable growth, but it's likely that investors are more focused on growth at this point.

"Based on the [reduction in force] announcement, we believe the 40%-plus growth target is at risk," Cikos explained.

Seeking Alpha contributor The Software Side of Lab recently said investors should hold on to GitLab ( GTLB ), calling it a long-term winner .

Analysts are largely positive on GTLB ( GTLB ). It has a HOLD rating from Seeking Alpha authors , while Wall Street analysts rate it a BUY . Conversely, Seeking Alpha's quant system, which consistently beats the market, rates GTLB a STRONG BUY .

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