Bargain Alert: Gitlab’s Slide Has Created a Temporary 40% Upside

Key Points

• Shares of Gitlab have been unable to stop sliding since last month’s weak forward guidance.
• However, every analyst update since then has been bullish, and the potential upside continues to grow.
• Investors should watch for any sign of a turnaround in the major indices, as this will likely lead to a similar turnaround in Gitlab.

Having seen its shares rally almost 200% in the nine months before this past February, software company Gitlab Inc NASDAQ: GTLB was finally starting to break out of a multi-year range. Having chosen to IPO at the tail end of 2021, it was one of those tech stocks that initially soared but then collapsed into 2022. 

The subsequent 80% drop, which only bottomed out in May of last year, is testament to that. Hence, investors started to get excited at the start of the year when suddenly Gitlab’s rally had the legs taken from under it. 

Weak Forward Guidance

A mixed earnings report in the first week of March was the culprit. Despite topping analyst expectations for both revenue and earnings, Gitlab’s forward guidance for the full fiscal came to light, which spooked investors. The stock has been trending down since then and, in fact, set a new low in Thursday’s session, but what's interesting is that not a single analyst has given up on them. 

In fact, in the immediate aftermath of the report, while Gitlab shares were in freefall, the likes of Goldman reiterated its Buy rating, as did the teams at Mizuho, William Blair and Piper Sandler. Key among these decisions to remain bullish on Gitlab’s outlook was its consistent top-line outperformance, and the fact that most found the forward guidance offered to be too conservative. Instead, they see potential profitability gains through its pricing strategies and the opportunity to leverage artificial intelligence (AI). 

However, this wasn’t enough to stop the investor exodus, and down shares went. Towards the end of March, though, more analysts were pointing at the buying opportunity as KeyBanc gave Gitlab an Overweight rating. They see the tech vertical that Gitlab operates in, DevOps, as “critical” and a “must-own category for software investors.” Then, last week, the Wells Fargo team made the same move, rating Gitlab Overweight and giving it a price target of $70. With shares on the verge of breaking below $50, that’s pointing to a solid targeted upside of nearly 40%. 

An Entry Opportunity

They consider the current selloff to be driving shares into oversold territory, which makes this a solid entry opportunity for those of us on the sidelines. Raymond James echoed this theme, rating and price target last Friday. 

But Gitlab shares are still falling, and they're currently down more than 30% from their pre-earnings price. So what gives? This is a company that just reported record revenues and its second-best earnings print ever. In addition, numerous analysts have stated their bullish outlook on the stock, with as much as 40% or 50% of targeted upside from current levels.

Getting Involved

While the company’s weak forward guidance drove the initial phase of the selloff, everything so far this month has been part of the broader downturn in equities. The benchmark S&P 500 index, for example, is having its worst run of the year so far as markets flinch from a surprise upturn in inflation. Since last November, the risk-on sentiment that’s been powering most stocks, including Gitlab, has definitely softened, but it’s hard to see this becoming anything more serious, for now at least. 

If anything, it’s a healthy correction for the broader market and one that makes Gitlab’s shares incredibly undervalued for bargain-hunting investors. From a technical perspective, the stock had even put in a double bottom, a bullish pattern pointing to an imminent rally, before the S&P 500’s slide gathered pace last week. Heading into the final few weeks of April, investors should keep a close eye on the major indices and Gitlab, as any sign of a turnaround in the former should lead to a rapid recovery in the latter.