GitLab (GTLB)

Software development tools maker GitLab (NASDAQ:GTLB) announced better-than-expected revenue in Q1 CY2025, with sales up 26.8% year on year to $214.5 million. The company expects next quarter’s revenue to be around $226.5 million, close to analysts’ estimates. Its non-GAAP profit of $0.17 per share was 11.8% above analysts’ consensus estimates.

Company Overview

Founded as an open-source project in 2011, GitLab (NASDAQ:GTLB) is a leading software development tools platform.

As Marc Andreessen says, "software is eating the world" which means the volume of software produced is exploding. But building software is complex and difficult work which drives demand for software tools that help increase the speed, quality, and security of software deployment.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Luckily, GitLab’s sales grew at an incredible 40.5% compounded annual growth rate over the last three years. Its growth surpassed the average software company and shows its offerings resonate with customers, a great starting point for our analysis.

This quarter, GitLab reported robust year-on-year revenue growth of 26.8%, and its $214.5 million of revenue topped Wall Street estimates by 0.7%. Company management is currently guiding for a 24.1% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 22.6% over the next 12 months, a deceleration versus the last three years. Still, this projection is noteworthy and indicates the market is forecasting success for its products and services.

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

GitLab’s ARR punched in at $805.4 million in Q1, and over the last four quarters, its growth was fantastic as it averaged 32.8% year-on-year increases. This alternate topline metric grew faster than total sales, which likely means that the recurring portions of the business are growing faster than less predictable, choppier ones such as implementation fees. That could be a good sign for future revenue growth.

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

GitLab does a decent job acquiring new customers, and its CAC payback period checked in at 44.4 months this quarter. The company’s relatively fast recovery of its customer acquisition costs gives it the option to accelerate growth by increasing its sales and marketing investments.

One of the best parts about the software-as-a-service business model (and a reason why they trade at high valuation multiples) is that customers typically spend more on a company’s products and services over time.

GitLab’s net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 124% in Q1. This means GitLab would’ve grown its revenue by 23.8% even if it didn’t win any new customers over the last 12 months.

Despite falling over the last year, GitLab still has a good net retention rate, proving that customers are satisfied with its software and getting more value from it over time, which is always great to see.

What makes the software-as-a-service model so attractive is that once the software is developed, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.

GitLab’s gross margin is one of the best in the software sector, an output of its asset-lite business model and strong pricing power. It also enables the company to fund large investments in new products and sales during periods of rapid growth to achieve outsized profits at scale. As you can see below, it averaged an elite 88.6% gross margin over the last year. Said differently, roughly $88.64 was left to spend on selling, marketing, and R&D for every $100 in revenue.

In Q1, GitLab produced a 88.3% gross profit margin, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Many software businesses adjust their profits for stock-based compensation (SBC), but we prioritize GAAP operating margin because SBC is a real expense used to attract and retain engineering and sales talent. This metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

GitLab’s expensive cost structure has contributed to an average operating margin of negative 14.9% over the last year. This happened because the company spent loads of money to capture market share. As seen in its fast revenue growth, the aggressive strategy has paid off so far, and Wall Street’s estimates suggest the party will continue. We tend to agree and believe the business has a good chance of reaching profitability upon scale.

Over the last year, GitLab’s expanding sales gave it operating leverage as its margin rose by 14.5 percentage points. Still, it will take much more for the company to reach long-term profitability.

This quarter, GitLab generated a negative 16.1% operating margin.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

GitLab has shown robust cash profitability, driven by its attractive business model that enables it to reinvest or return capital to investors while maintaining a cash cushion. The company’s free cash flow margin averaged 23.4% over the last year, quite impressive for a software business. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

GitLab’s free cash flow clocked in at $105.4 million in Q1, equivalent to a 49.1% margin. This result was good as its margin was 27 percentage points higher than in the same quarter last year. Its cash profitability was also above its one-year level, and we hope the company can build on this trend.

Over the next year, analysts predict GitLab’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 23.4% for the last 12 months will decrease to 16.3%.

Businesses that maintain a cash surplus face reduced bankruptcy risk.

GitLab is a well-capitalized company with $1.10 billion of cash and no debt. This position is 15.4% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

It was great to see GitLab raise its full-year EPS guidance. We were also glad this quarter's EPS and adjusted operating income exceeded Wall Street’s estimates by a wide margin. On the other hand, its full-year revenue guidance was in line, and investors were likely hoping for more. Shares traded down 11.9% to $42.76 immediately after reporting.

Updated: June 23, 2025 at 10:23 PM EDT

Before investing in or passing on GitLab, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

There is a lot to like about GitLab. For starters, its revenue growth was exceptional over the last three years. And while its forecasted free cash flow margin suggests the company will ramp up its investments next year, its admirable gross margin indicates excellent unit economics. On top of that, GitLab’s expanding operating margin shows it’s becoming more efficient at building and selling its software.

GitLab’s price-to-sales ratio based on the next 12 months is 6.8x. Looking across the spectrum of software companies today, GitLab’s fundamentals shine bright. We like the stock at this price.

Wall Street analysts have a consensus one-year price target of $63.24 on the company (compared to the current share price of $41.25), implying they see 53.3% upside in buying GitLab in the short term.