rewrite this title Is Gitlab Losing Ground in the AI Coding Race? – Nanalyze

The ability for artificial intelligence (AI) to improve itself with no assistance (also called recursive learning) is the most powerful concept imaginable. That will lead us to artificial general intelligence (AGI) which could pivot mankind into an age of immeasurable abundance or a dystopian era that resembles hell on earth. The odds are about 50-50 right now as everything changes faster than anyone can keep track of. At a tactical level, AI needs to write code first. Today, that ability represents some of the biggest fastest-growing software success stories in history – explosive revenue growth that’s never been seen before.

Since all of the above companies remain privately held, we turned to one of the only pure-play ways to get exposure out there – GitLab $GTLB – which isn’t living up to all this tangible hype. After realizing 26% revenue growth last year, they’re expecting just 16% growth this year at midpoint. Let’s start with why this company ought to be making hay while the sun shines.

The GitLab Growth Thesis

AI algorithms are only as good as the big data you feed them. With around 50 million users and 10,000 customers paying more than $5,000 a year, GitLab has a lot of data to build AI products on top of (more on this in a bit). Contrast this with GitHub which counts upwards of 3X as many users, all of whom belong to the Microsoft ecosystem, and which commands the most successful AI coding agent to date, bringing in over $1 billion (according to the above chart by CB Insights). That’s about as much revenue as GitLab plans to bring in this coming year.

The extent to which GitLab can upsell new AI products to existing customers is reflected in net retention rate or NRR which has now fallen below 120% – the benchmark for a decent SaaS firm.

Early on in their earnings call, GitLab says what we’re all thinking. “We aren’t satisfied with our revenue growth guidance.” They then present five buzzword-laden strategies that are expected to achieve greater growth in the coming year. Increasing salespeople, upselling new customers up front, and providing more granular pricing all sound like tactical methods to improve the sales process. Will these really be moving the needle much?

To increase NRR, GitLab needs to sell new AI-centric offerings that build on their current infrastructure. That comes in the form of (wait for it… wait for it…) the GitLab Duo Agent Platform. That’s right. Agentification is the answer, but this year it’s “about converting pilots to production, not significant revenue contribution,” given they just launched this new offering in January. Ideally, they’ll be back to 20% growth in Fiscal 2028 which is actually 2027. Below we’ve charted GitLab’s revenues using actual years, not this “fiscal” rubbish which does nothing but confuse people.

All this talk about growth in 2027 starts to give off UiPath $PATH vibes. It’s all about waiting just one more year to see a return to 20% growth. With 70% of their revenue coming from self-managed customers, upgrades are slow to happen unless they’re driven by users. The pricing model for GitLab’s agent platform is to “charge based on work and value delivered,” so it all comes down to this. Unless they’ve built something incredibly useful, customers aren’t going to use it, and net retention rate won’t reverse its current slide.

Management recently said that “gross retention rate reached its highest level in the last four years,” which implies they’re not losing customers to competitors like Microsoft. With gross margins close to 90%, they’re pretty much printing cash which means Microsoft could easily compete on price and undercut them out of the market. Price-sensitive customers represent roughly 20% of their annual recurring revenues, while “pressure in the mid-market and SMB segments” is said to be driving their declining net retention rate.

In the meantime, shares of the company have fallen firmly into value territory.

Value or Value Trap

With $1.3 billion in cash and positive operating cash flows, GitLab has decided to start buying back shares with $400 million of that while prioritizing investments in growth. Indeed, an argument can be made that shares are meaningfully undervalued. Based on last quarter’s revenues of $262 million and a market cap around $3.8 billion, the company has a simple valuation ratio (SVR) of 3.7 which is well below our target of 10 (based on a past four-quarter average). It’s also about half our catalog average of 7, which seems quite low for an extremely profitable company with decent growth despite current headwinds.

Remember, most software companies have seen a decline in valuation caused by concerns surrounding large language models displacing enterprise software. That’s something we addressed earlier this year and needs to evaluated for each distinct company.

GitLab’s move to usage-based pricing for their agentic offering alleviates concerns around seat-based pricing being eroded. Their “AI moat” would be the system of record depth – all the code stored in their platform – though that’s not accessible to train AI algorithms for the 70% of clients that host their own solutions. For security-sensitive clients like the government, that’s a strong selling point. Human-in-the-loop intensity is high and will likely remain high across the entire software development lifecycle (SDLC). The critical importance of the functionality provided by GitLab creates stickiness. Chief Technology Officers won’t just port their entire codebase over to some flashy large language model LLM newcomer. GitLab would argue that all these fast-growing AI coding tools just sit on top of their platform, not replace it.

If that’s the case, then it would seem like GitLab would make for an attractive acquisition at today’s depressed prices.

Thinking Like an MBA

The below succinct commentary from our New Money Report states why we continue to be bullish on GitLab.

McKinsey estimates that software development is one of the industries that stands to benefit most from generative AI. GitLab’s AI-enabled software development platform strikes us as a key beneficiary, with 90% gross margins and strong revenue growth.

That last part is where they’re starting to falter. Mid-teen revenue growth is passable, but not indicative of a company that’s benefiting from the money being poured hand over fist into AI coding tools.

This conundrum GitLab finds itself in would make for the perfect MBA case study. What would you do if you were in charge? One option would be to pursue an acquisition, given the depressed valuation. Several years ago, it was rumored that Datadog $DDOG was considering an acquisition of GitLab at twice their current valuation. Then last year, the acquisition rumors surfaced again. Datadog was working with Morgan Stanley to launch a fresh takeover bid for GitLab, potentially over $60 per share. The source? Unnamed sources. Acquisition rumors and five bucks might get you a coffee at Starbucks, but we can’t help but consider the value on offer here.

Acquiring GitLab would let an AI coding provider (perhaps excluding GitHub for antitrust reasons) embed their solutions across the entire development life cycle as opposed to just helping developers sling code. They’d also be acquiring a large notable customer base – over 50% of the Fortune 100 – that consumes a sticky product offering which could easily be upsold adjacent product offerings. GitLab remains a leader in the Gartner Magic Quadrant for AI Code Assistants – barely – and joining forces with a competitor would give them a better chance of defeating the evil empire which currently dominates all others – Microsoft’s GitHub.

But why would a competitor need to acquire GitLab when they’re already growing faster than any software product offered ever? Perhaps the IBM types might find the platform compelling to acquire, or anyone else looking to bolt on some “AI” so they can look more relevant. We’re tempted to use a word that gets thrown around too much by people who can barely spell it. There could be an “asymmetric opportunity” here. The cheaper GitLab gets, the more likely it is to be acquired which (in the words of male astrologists) provides some price support.

That’s not reason enough to buy shares of GitLab, though. You could argue they’re worth adding on their own merits, provided management can execute on their five proposed growth accelerants and begin to reap the rewards around the time UiPath does – next year. (Don’t say it. Don’t say it.) It would seem like GitLab represents an asymmetrical investment opportunity at these prices.

Conclusion

We invest in companies, not stocks. While the stock has been absolutely plummeting, the company hasn’t triggered any of our selling rules. In fact, you could argue it represents great value for what’s on offer. The thesis remains the same. Revenue growth guidance, while notably weaker than last year, remains sufficient. It comes down to whether management can execute on these “five factors” to resurrect growth this year and then guide to stronger growth next year when their agentic platform starts to mature. If they don’t, the writing may be on the wall, and whatever buyer might be considering an acquisition – if any – isn’t going to be paying a premium price.