AI And DevSecOps With AWS Will Unlock New Opportunities

Key Takeaways

• GitLab's expansion into mid-market and enterprise segments and new product offerings aim to drive revenue growth through enhanced customer engagement and retention.
  
• Strategic partnerships and innovation in AI and DevOps are expected to strengthen market reach, enhance sales efficiency, and support earnings growth.
  
• Intensifying competition, macroeconomic factors, and delayed revenue realization may challenge GitLab's growth, despite positive pricing strategy results and potential earnings visibility concerns.

Catalysts

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

• GitLab's focus on expanding its customer base, particularly in mid-market and enterprise segments, aims to drive long-term revenue growth by leveraging areas where expansion potential is high. This strategic emphasis is expected to impact revenue positively.
  
• The introduction of new product offerings like GitLab Duo and GitLab Dedicated targets increased adoption of AI in DevSecOps and offers distinct value propositions, which could enhance customer engagement and retention, positively affecting revenue and net margins.
  
• GitLab's emphasis on improving go-to-market operations with a newly appointed CRO and expanded customer success initiatives is designed to enhance sales efficiency and customer satisfaction, likely leading to improvements in net margins and earnings.
  
• The company’s investment in strengthening partnerships with hyperscalers like AWS and AI integration expands market reach and provides collaborative opportunities that could boost revenue and provide innovative capabilities, supporting earnings growth.
  
• GitLab’s dedicated effort to accelerate innovation in AI, security, and DevOps, combined with a strategic focus on R&D, is projected to drive advancements in product offerings. This is expected to reinforce revenue growth and future earnings by enabling more substantial platform adoption and customer upgrades.

GitLab Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming GitLab's revenue will grow by 24.3% annually over the next 3 years.
• 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 -0.8% to the average US Software industry of 12.0% in 3 years.
• If GitLab's profit margin were to converge on the industry average, you could expect earnings to reach $175.2 million (and earnings per share of $0.97) by about April 2028, up from $-6.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 92.4x on those 2028 earnings, up from -1222.6x today. This future PE is greater than the current PE for the US Software industry at 32.0x.
• Analysts expect the number of shares outstanding to grow by 3.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.63%, as per the Simply Wall St company report.

GitLab Future Earnings Per Share Growth

Risks

• The competitive landscape for GitLab, particularly in the Code gen market, is intensifying with entries like GitHub Copilot, standalone tools, and offerings from significant players such as Anthropic and Amazon. This increased competition could impact GitLab's revenue growth as customers have more choices.
  
• GitLab's non-GAAP financial measures exclude certain unusual or nonrecurring items, which could obscure the actual financial health of the company. Such reporting could potentially impact earnings visibility.
  
• While GitLab Dedicated is growing, the financial impact of these initiatives is not immediate, suggesting a possible delay in revenue realization from new product lines such as Duo Enterprise and Dedicated.
  
• The macroeconomic environment remains a variable, with cautious spending by potential customers persisting over the past year. This could impact GitLab's ability to expand its revenue base as spending slows.
  
• GitLab’s pricing strategy has shown positive results, but the long-term sustainability of incremental revenue and margin expansion due to these pricing actions may face challenges, potentially affecting net margins if customers resist further price increases.

Valuation

• The analysts have a consensus price target of $72.115 for GitLab based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $90.0, and the most bearish reporting a price target of just $45.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.5 billion, earnings will come to $175.2 million, and it would be trading on a PE ratio of 92.4x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $47.16, the analyst price target of $72.11 is 34.6% 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.