Fragmenting DevOps Pipelines Will Undermine Future Profitability

Key Takeaways

• Proliferation of AI tools, bundled competitor offerings, and architectural trends threaten GitLab's platform relevance, pricing power, and overall market opportunity.
  
• Rising regulatory demands and relentless innovation spending increase costs, challenging profitability and long-term earnings growth.
  
• Strong AI-driven product adoption, expanding enterprise partnerships, and resilient margins position GitLab for sustained revenue growth and long-term profitability amid ongoing digital transformation trends.

Catalysts

Develops software for the software development lifecycle in the United States, Europe, and the Asia Pacific.

• The rapid proliferation and adoption of AI-driven coding assistants and automation tools by developers, both within and outside of traditional DevOps platforms, threatens to fragment the software development toolchain. This could significantly undercut GitLab's platform stickiness and reduce future user and seat expansion, thereby weighing on revenue growth and limiting net retention rate improvements.
  
• Persistent intense competition from hyperscalers and larger, more deeply resourced players such as Microsoft and Atlassian, who are aggressively bundling CI/CD and DevOps tools (often for free or at steep discounts), is likely to accelerate commoditization in the market. This dynamic will place downward pressure on pricing and gross margins, directly undermining GitLab's long-term earnings potential.
  
• As regulatory focus on data privacy and software supply chain integrity intensifies globally, GitLab faces mounting compliance and liability costs. This will increase operating expenses and potentially slow adoption among risk-averse enterprise clients, ultimately crimping operating margins and free cash flow generation over time.
  
• The ongoing and potentially escalating investment requirements in AI and R&D to maintain competitive parity are likely to keep operating margins under pressure, making durable profitability challenging. Costly product innovation is required simply to defend share, not expand it, limiting the ability for net income and earnings per share to materially scale from current levels.
  
• The accelerating trend towards low-code, no-code, and serverless software architectures threatens to bypass traditional full-stack DevOps pipelines entirely. Should enterprises shift significant workloads in this direction, GitLab's core value proposition-and with it, revenue trajectory and addressable market size-could erode meaningfully in future years.

GitLab Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on GitLab compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming GitLab's revenue will grow by 21.3% annually over the next 3 years.
• The bearish analysts are not forecasting that GitLab will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate GitLab's profit margin will increase from 1.6% to the average US Software industry of 13.2% in 3 years.
• If GitLab's profit margin were to converge on the industry average, you could expect earnings to reach $189.9 million (and earnings per share of $1.05) by about August 2028, up from $13.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 54.3x on those 2028 earnings, down from 557.8x today. This future PE is greater than the current PE for the US Software industry at 40.4x.
• Analysts expect the number of shares outstanding to grow by 2.93% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.39%, as per the Simply Wall St company report.

GitLab Future Earnings Per Share Growth

Risks

• The global acceleration of digital transformation continues to drive strong demand for modern software development platforms, evidenced by GitLab's 27% year-over-year revenue growth and record free cash flow, which suggests the company is benefiting from durable, long-term demand and this may support top-line revenue growth.
  
• Increasing adoption of AI and automation throughout the software development life cycle leads to rising volumes of code, growing numbers of code creators, and stronger productivity-trends GitLab's unified AI-native platform is positioned to capitalize on, potentially sustaining high net retention rates and recurring revenue.
  
• GitLab's expanding product suite and successful integration of AI features such as Duo Enterprise, along with flexible packaging and partnerships like Amazon Q, are broadening its addressable market, driving expansion deals even within large regulated enterprises and public sector, thus supporting both revenue growth and improved operating leverage.
  
• The company's land and expand strategy, with growing penetration of Premium and Ultimate tiers (Ultimate now over 50% of ARR) and strong customer expansion rates (Q1 dollar-based net retention at 122%), indicate enduring pricing power and margin resilience that could enhance both revenue and earnings over time.
  
• Exceptional gross margin (90% non-GAAP) and record free cash flow margin (49% in Q1), combined with an asset-light business model and over $1.1 billion in cash, provide GitLab with significant capacity to invest in innovation and withstand macroeconomic headwinds, supporting sustained improvements in net margins and future profitability.

Valuation

• The assumed bearish price target for GitLab is $45.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of GitLab's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $85.0, and the most bearish reporting a price target of just $45.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.4 billion, earnings will come to $189.9 million, and it would be trading on a PE ratio of 54.3x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $44.0, the bearish analyst price target of $45.0 is 2.2% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.