Gitlab stock slides, presents buying opportunities

The one from Gitlab NASDAQ: GTLB Fourth-quarter results and guidance failed to meet market expectations, sending the stock down 20%. The bottom line is that an AI-fueled bubble has burst for this market, but the story isn’t over. However tepid the forecasts may be, the results versus consensus are overshadowed by sustained, top-line growth and improving margins, with analysts reaffirming their ratings and the prospect of a rebound in share prices.

The stock price may wallow in the first and second quarters of the calendar, 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 stock price will recover as the company’s valuation rises and may even reach new highs this year.

Gitlab fails to meet exaggerated expectations

Gitlab had a solid quarter and beat consensus forecasts in both top and bottom lines, but a few details hurt the price action, mainly the valuation. The stock was trading at about 350X its fiscal 2024 earnings estimate and 150X its fiscal 2025 earnings estimate before the report, and performance and guidance fall short of those numbers.

Revenues of $163.8 million beat consensus, but the 350 basis points of outperformance isn’t much considering the market. Most AI companies outperform by low single digits, and leaders by more, and growth is decelerating. The 33.3% recorded in the fourth quarter is better than expected but is in line with the previous quarter and the forecast is weak. The guidance suggests growth will slow by 500 basis points in fiscal 2025.

Details that suggest a rebound will occur include prospects for sustained double-digit growth and margin widening. The company’s RPO increased by 55% thanks to the increase in subscriptions and licenses driven primarily by large customers. Enterprise customers contributing more than $1 million in trailing ARR are leveraging the DevSecOps platform and growing their business by 52% year-over-year. Smaller businesses contributing more than $100,000 and $5,000 increased 37% and 23%, respectively.

Margin news is another bright spot in the report. The company improved its margin on revenue growth and penetration. The net retention rate is 130% and is expected to remain high this year as new products and features are introduced. The company continues to report GAAP losses, but achieved cash flow neutral operations a year ahead of schedule and reported an adjusted profit. Adjusted operating operating margin of 8% increased 1,900 basis points for the quarter and is expected to remain positive into F2025.

Guidance Derails Uptrend in Gitlab

Driving is the main cause of the stock price implosion. The company guided for 25% year-over-year revenue growth, but missed consensus on top-line and bottom line. Analysts had expected to see $0.30 in adjusted earnings this year, and the company expected $0.19 to $0.23. The bottom line is that analyst sentiment was overzealous and the market reset. The company’s guidance may be cautious, so there is a possibility that it could improve its outlook later in the year. Regardless, sustained double-digit growth and a pivot to profitability is good news for any tech stock.

Analyst activity is mixed following the report, with one raised price target offset by a lowered one. However, the two analysts who made the initial forecasts reaffirmed Outperform-equivalent ratings and see the stock trading in the $74 to $75 range. That’s 10% above the consensus target and 20% below above the current action.

The market is down and may struggle to recover soon, but support is there. The market has fallen to a significant resistance level, broken at the end of last year, presenting an attractive entry point for new money this year. If this level continues to provide support, it will confirm a head and shoulders bottom. This fund has an upside bias with increasing support and could continue to complete a reversal. In such a scenario, a return to the $75 level would lead to a new high and a bullish market.

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