AI DevSecOps Platform Will Benefit From Long Term Cloud Neutral Demand

Catalysts

About GitLab

GitLab provides a unified DevSecOps platform that automates and secures the end-to-end software development life cycle for organizations of all sizes.

What are the underlying business or industry changes driving this perspective?

• Accelerating AI driven code creation is driving a surge in CI pipelines, deployments and releases on GitLab. This positions the company to monetize higher activity through its hybrid seat plus usage model and expand revenue faster than seat growth.
• The Duo Agent platform, with its deep context across code, security, compliance and deployment workflows, can become a mission critical orchestration layer for enterprise AI agents. This can increase high value attach rates and support durable net retention above historical levels.
• As enterprises consolidate fragmented DevSecOps and security tooling onto GitLab Ultimate and Dedicated, the company is replacing multiple point solutions per customer. This is expanding average deal sizes and structurally improving gross and operating margins.
• Growing demand for cloud neutral, vendor independent infrastructure and AI choices favors GitLab’s open, multi cloud architecture. This supports long run ARR growth and provides pricing power in strategic accounts that can lift earnings over time.
• The rise of stricter security, compliance and governance requirements for AI enabled software development makes GitLab’s integrated security and regulated industry credentials increasingly important. This supports sustained double digit SaaS growth and robust free cash flow generation.

Assumptions

This narrative explores a more optimistic perspective on GitLab compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming GitLab's revenue will grow by 25.8% annually over the next 3 years.
• The bullish 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 -5.1% to the average US Software industry of 12.4% in 3 years.
• If GitLab's profit margin were to converge on the industry average, you could expect earnings to reach $224.0 million (and earnings per share of $1.19) by about December 2028, up from $-46.5 million today.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 77.1x on those 2028 earnings, up from -138.1x today. This future PE is greater than the current PE for the US Software industry at 32.4x.
• The bullish analysts expect the number of shares outstanding to grow by 3.76% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.43%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• GitLab is transitioning from a primarily seat-based model to a hybrid seat plus usage-based model at the same time AI tooling and pricing across the industry remain unsettled. If customers resist or slow their adoption of the new Duo Agent usage pricing or choose rival AI platforms, higher activity on the platform may not translate into proportional monetization, limiting long-term revenue growth and earnings leverage.
• Management repeatedly highlights ongoing SMB weakness and lingering U.S. public sector headwinds. If these pressures persist or broaden to other geographies or segments during a macro slowdown, new logo growth and first order wins could remain below expectations for multiple quarters, constraining subscription revenue expansion and compressing net margins as sales capacity is added into a softer demand environment.
• Roughly 70% of revenue still comes from self-managed customers that upgrade slowly. If this base delays moving to newer versions or is cautious about adopting Duo Agent platform because of security, governance or operational risk concerns, AI features may see a slower ramp than investors anticipate, dampening net retention, limiting upsell driven ARR growth and delaying operating margin expansion tied to higher value SKUs.
• GitLab is positioning itself as an AI orchestration and DevSecOps backbone while hyperscalers and large AI model providers aggressively move up stack into developer workflows. If these larger players bundle DevSecOps like capabilities with their clouds or AI suites on attractive commercial terms, GitLab’s differentiation in context and tooling could narrow over time, pressuring pricing power, gross margins and the long run earnings profile.
• The company is scaling a new global first order sales organization and ramping significant investment into AI innovation while also absorbing ongoing JiHu related expenses. If execution missteps, hiring ramp delays or product packaging misalignment lead to lower than expected customer acquisition or AI attach, operating efficiency gains seen in recent quarters could reverse, putting downward pressure on operating margin and free cash flow generation.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for GitLab is $72.0, which represents up to two standard deviations above the consensus price target of $53.52. 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 bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $72.0, and the most bearish reporting a price target of just $40.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $1.8 billion, earnings will come to $224.0 million, and it would be trading on a PE ratio of 77.1x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $38.1, the analyst price target of $72.0 is 47.1% higher.
  
• 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.