GitLab is developing an AI-powered market reversal

GitLab NASDAQ: GTLB was already a Most Upgraded Stock on the Marketbeat platform going into its Q3 results, which is unlikely to change soon. What is likely to change is the trend in the consensus price target. The consensus price target has been trimmed over the past few months, coming down to about +5% ahead of the earnings release as analysts tempered expectations. 

Because the earnings release included top and bottom line strength, improved guidance and unexpected profitability several quarters sooner than expected, price targets will likely start getting lifted and lead the market higher. Until then, GTLB shares are up 13% following the release, trading in alignment with the consensus target and on the brink of completing a full reversal. 

Developers are getting it done with GitLab AI Tools 

GitLab is a dual-play on AI with AI-powered tools for developers that help them develop AI and other software applications. The company’s DevSecOps platform is proving to be of true utility for clients, which continue to grow in size, number, and business activity. 

“With enterprises facing complexity from all directions, they need a partner to help them realize business value. GitLab helps improve developer productivity and reduces software spend, which is why our customers report seeing 7x faster cycle times with GitLab,” says Sid Sijbrandij, CEO and co-founder. 

The combined impact of client growth and penetration led revenue to $149.67 million, or up 32.5% YOY and 615 basis points above the Marketbeat.com consensus. Gains were made in all client groupings led by large clients. Clients contributing more than $100K in ARR grew by 37%, aided by new customers and penetration. Net retention is up 128% YOY, aiding leverage and the top line. 

The margin is the most impressive portion of this impressive report. The company’s gross margin runs near 90%, and it has produced the first adjusted profit in its history. The adjusted margin improved more than 2200 bps to 3%, leaving adjusted EPS at $0.09 and a dime ahead of expectations. Because there is such a wide difference in the gross and operating margin, investors can expect to see a significant widening in the coming years, and there is evidence in the guidance. 

Guidance for Q4 is favorable, with sequential and YOY growth. The mid-point for revenue is $157.5 million or up 28%, and may be cautious given the momentum and top-line leverage. Adjusted earnings are expected to be $0.12 to $0.13 and may also be cautious. 

Institutions cap gains in Q4 for GTLB stock

Institutional interest in GTLB is high and rising at 54%, and 2023 is bullish on balance, but there is a but. The institutions have sold on balance in Q4 and may cap gains in the near term. If the institutions continue to take profits or trim positions, it is unlikely the stock will be able to break above critical resistance. However, the Q3 results are solid and should provide a catalyst for them and the analysts. 

The technical picture is promising for this tech stock. The stock is up double-digits following the release and will create a strong green candle if it closes the week at this level. In that scenario, the market will indicate strong support at the 150-day moving average and a high likelihood of continuing higher. The critical resistance is at $58.70 and $70. A move above the first should lead to a test of the other. If the analysts and institutions perform as expected, the market could continue higher before the following earnings report.