Why Do Analysts Love This Mid-Cap Software Stock?

Based in the tech hub of San Francisco, GitLab (GTLB) provides a development platform to streamline collaboration across the entire software lifecycle. GitLab manages the software development process by integrating essential elements such as SCM, CI/CD, and security into one application. This integrated approach shortens deployment intervals and fosters stronger cooperation among development, operations, and security teams.

Following the broader megatrend, GitLab is accelerating its efforts in artificial intelligence (AI), redefining software development within its DevSecOps platform to boost productivity and security throughout the development lifecycle. The company recently earned recognition as a leader in Gartner's 2024 Magic Quadrant for AI Code Assistants, highlighting its commitment to integrating AI deeply into its tools.

One of the key components of this advancement is the integration of Anthropic's Claude AI model into GitLab's Duo suite, which marks a significant advancement in AI-assisted code generation. This innovative move offers automated code suggestions, error resolution, and security enhancements. 

Valued at a market cap of $8.75 billion, shares of this mid-sized software company are down by 14.2% year-to-date and have pulled back by 31% from their 52-week highs set in February, around $76. However, GTLB shares have rebounded convincingly from the year-to-date low of $40.72 set in mid-August, up 32.6% since then thanks to well-received earnings.

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Gitlab Reported "Beat and Raise" Quarterly Results

After the close on Sept. 3, GitLab posted impressive second-quarter results that surpassed expectations. Revenue grew by 31% to $182.6 million, while adjusted earnings per share (EPS) of $0.15 topped estimates of $0.10. 

“We delivered another quarter of better than 30% top-line growth and significant year-over-year operating margin expansion," noted CFO Brian Robins.

The number of customers with more than $100,000 of annual recurring revenue (ARR), a key metric, rose 33% year over year to 1,076. Total remaining performance obligations (RPO) grew 51% year-over-year to $747.9 million, and current RPO (cRPO) ramped up 42% to $475.0 million.

On the balance sheet, GitLab generated operating cash flow of $11.7 million and adjusted free cash flow of $10.8 million during the quarter. 

GitLab's management also guided higher for the full year, with the outlook now calling for revenue of $743 million on EPS of $0.46, at the midpoint, for fiscal 2025. 

In response, GTLB stock surged more than 21% on Sept. 4.

Is GitLab Stock Overvalued?

There is no doubt that GitLab's growth has been quite impressive throughout the year. As a result, the stock is now priced at a premium - at 11.87 times price-to-sales, and a 3.17 price/earnings-to-growth (PEG) ratio, on an adjusted basis. 

To justify this valuation, GitLab will need to continue growing at a rapid pace in the coming years. 

What Do Analysts Say About GitLab Stock?

GitLab's impressive performance has garnered bullish attention from analysts, with 25 experts in coverage giving the stock a “Strong Buy” rating overall.

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Needham analysts just upgraded GTLB from “hold” to “buy” and set a price target of $70, commenting that GitLab's product expansions, particularly "Duo Pro Enterprise" and "Dedicated," will bolster the Ultimate tier's appeal. 

“To the extent GitLab outperforms guidance and demonstrates better-than-expected leverage, we believe investors will reward shares with a higher multiple,” wrote Needham in a note accompanying the upgrade.

Separately, Bernstein believes that GitLab's new AI copilots could resolve developer productivity bottlenecks and boost growth. The firm has a price target of $70 and an “outperform” rating on GitLab.

And on Oct. 9, Morgan Stanley initiated coverage with a “buy” rating and $70 price target, which the brokerage firm backed late last week.

The average price target for GTLB is $65.12, a premium of 20.9% to today's close. The Street-high target is $80, courtesy of Goldman Sachs.

On the date of publication, Nauman Khan did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.