GTLB - Understanding The Bull Case For Investing In GitLab

2024-06-11 08:06:50 ET

Summary

• GitLab recently reported Q1 FY 2025 earnings, beating revenue estimates by 2% and exceeding non-GAAP earnings per share estimates by 75%.
• Its DevSecOps platform aims to reduce complexity and build in security throughout the software development cycle, offering tools for planning, creating, integrating, verifying, deploying, operating, monitoring, and improving software.
• The company's potential upside may justify its premium valuation.

Software development platform GitLab (GTLB) reported its first quarter fiscal year ("FY") 2025 earnings on June 3, 2023. It beat analysts' consensus revenue estimates by nearly 2% and exceeded non-GAAP (Generally Accepted Accounting Principles) earnings-per-share ("EPS") estimates by 75%. Although the company beat analysts' estimates, investors have been disappointed in it recently due to slowing revenue growth and the fact that it is unprofitable. That is two disappointing quarters in a row. The stock dropped 21% after releasing the fourth quarter FY 2024 earnings report on March 4 and declined 4% after this recent earnings report.

This economic environment turned against the company in 2022 when the Federal Reserve raised interest rates and maintained them at an elevated level. GitLab's customers have become cautious about spending, and investors have avoided investing in unprofitable companies with declining revenue growth. The stock price will likely continue to flounder until the central bank lowers interest rates. If you decide to invest in GitLab today, you must take a long-term view.

There are reasons people may decide to invest. The positives are that GitLab has several favorable secular tailwinds, including organizations motivated to consolidate multiple software solutions onto one platform, the increasing focus on incorporating cybersecurity earlier in software development, and companies adopting generative Artificial Intelligence ("AI"). GitLab runs a software development platform that should take advantage of all those trends in a market estimated to be $40 billion and growing. Since the company made $622.20 million in trailing 12-month ("TTM") revenue at the end of its April quarter, it has penetrated only 1.5% of its total addressable market ("TAM"). I rate the stock a buy....

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