GitLab, Inc. (NASDAQ:GTLB) was a clear AI winner and the company responded with fantastic results. The DevSecOps leader is a clear beneficiary of AI boosting software development, leading to strong results, while other enterprise software companies struggle with the transition. My investment thesis remains Neutral on the stock following the big rally after the strong earnings report.

Another Big Beat

GitLab just reported sales for FQ2 ’25 surged by 31%, with the company reporting the following numbers:

While other enterprise AI software related companies have struggled to generate fast growth, GitLab is clearly seeing the benefits of being involved in the process of new code development boosted by generative AI. As the company suggests, every organization has to be great at developing, securing, and deploying software even faster now.

GitLab suggests their AI solution boosts deployment velocity by 55% while producing faster vulnerability detection by 50%. The company is the 2024 Gartner Magic Quadrant leader for AI code assistants.

The amount of customers generating greater than $100K in ARR jumped to 1,076, up 33% from 810 last FQ2. Large customers continue to see great value in the DevSecOps services of GitLab, with a dollar-based net retention rate at a strong 126%.

As the results highlight, GitLab has years of strong growth ahead. Even the conservative forecasts of management maintained growth in the 25% range, while the company appears to have an opportunity closer to 30% with the market preferring an independent leader in the sector.

Oddly though, GitLab only guided to FQ3 revenues of $187 to $188 million, actually slightly below consensus estimates. The market just ignored this guidance hiccup, suggesting the October growth rate dips to 25%.

The company regularly beats consensus quarterly estimates by $5+ million. Outside of FQ1 ’25 and FQ4 ’23, GitLab has reported $5+ million quarterly sales beats since going public, suggesting growth could easily top estimates and reach the high 20% growth range.

GitLab is very profitable and cash flow positive now, with an expectation for up to $20 million in FQ3 income. The company already has $1.1 billion in cash, so the positive cash flows will start providing management with options to acquire businesses or return cash to shareholders without diluting shares.

Don’t Chase

As with any stock, the key is buying GitLab at the right price. The stock has been tasty in the low-$40s and not so appealing back in the mid-$50s. The stock has already surged back to $55 after the strong quarterly report.

GitLab dipped to the low $40s in both the June and early August timeframes. Investors might not get another opportunity to buy the stock that cheap, but opportunities regularly exist to scoop shares at a cheaper price.

GitLab has a market cap of ~$9 billion, with an enterprise value in the $8 billion range. The FY26 revenue target is only $927 million, which is why the stock isn’t as appealing after rallying to the mid-$50s.

The DevSecOps leader operates in a strong growth sector. Investors paying the right price should generate solid returns going forward, but any stock just gets expensive at 10x forward EV/S targets, providing limited upside in the near term.

GitLab only forecasts adjusted profits in the $0.15 range for FQ3 along with a target for just $0.45 in FY25. Investors definitely need a far more profitable company in order to pay a premium multiple of sales.

The DevSecOps company has 90%+ gross margins, so opex leverage is highly likely going forward. The company hit a 10% operating margin in FQ2, up from a loss last year. Still, analysts only forecast a FY26 EPS target of $0.65 for a stock already trading at $55, or over 85x forward EPS targets.

Takeaway

The key investor takeaway is that GitLab is likely to continue producing sales growth close to 30%. The AI revolution is only increasing the demand for developing and deploying software securely. The stock is very volatile (beta >2) for these reasons, and crafty investors can likely continue picking up GitLab on weakness versus chasing the stock at premium valuations.