GitLab Stock Drops on Conservative Guidance. Here's Why This Pullback Looks Like a Buying Opportunity.

Key Points

• GitLab shares fell despite the company seeing accelerating revenue growth that easily surpassed expectations.

• The company is working to shift to a hybrid seat-plus-usage-based model, which could help drive growth.

• The stock has gotten very cheap, despite its strong, consistent growth.

• 10 stocks we like better than GitLab ›

Share prices of GitLab (NASDAQ: GTLB) slid after the company issued conservative guidance and announced its chief financial officer (CFO) was leaving. The stock now trades down about 20% on the year.

However, the sell-off looks overdone, as the company issued conservative revenue guidance with its fiscal Q1 report only to crush its fiscal Q2 revenue forecast. Meanwhile, companies typically issue very beatable guidance when a new CFO is set to come in, as they want to make them look good.

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Let's take a closer look at GitLab's recent results and future prospects.

Image source: Getty Images.

Continued strong revenue growth

For those unfamiliar with GitLab, it's known as a DevSecOps (development, security, and operations) platform. That's basically the secure environment organizations need to need to develop software. However, the company has quietly been transforming itself into a more comprehensive software development lifecycle (SDLC) platform that not only helps companies securely develop their software but also helps make end-to-end workflow more efficient.

The company has been innovating aggressively, saying it introduced 72 new features across its paid offerings. This includes not only in the area of DevSecOps, but also in areas such as compliance and security. GitLab is also tightly integrating artificial intelligence (AI) into its platform, including introducing AI agents through its Duo Agent platform.

With Duo Agent, the company said it is looking to move beyond just a seat-based model toward a hybrid seat-plus-usage-based model. It said with Duo Agent that customers will now have a set amount of usage with their subscriptions, while they will be able to add additional usage upfront or pay as they go. It's also struck agentic partnerships with Anthropic, OpenAI, Alphabet, Amazon, and Cursor. Thus far, Duo agent usage has been skyrocketing, albeit off a small base, and it's up sixfold.

Meanwhile, customers continue to move more toward GitLab's higher-tier solutions. It said 8 of its 10 largest deals in the quarter were for its Ultimate tier, and that Ultimate now represents 53% of total annual recurring revenue (ARR). GitLab Dedicated, which is a single tenant solution used by companies that have strict compliance, saw ARR surge 92% to about $50 million.

GitLab once again generated strong quarterly revenue growth. For its fiscal 2026 Q2 (ended July 31, 2025), revenue climbed 29% year over year to $236 million. That was far ahead of the company's forecast for revenue of between $226 million and $227 million, which would have been growth of 24%. It was the eighth straight quarter that GitLab has posted year-over-year revenue growth of between 25% to 35%.

Data source: GitLab earnings reports. YOY = Year over year.

Subscription revenue in Q2 jumped 30% year over year to $212.7 million, while license revenue climbed 20% to $23.3 million.

The company continues to do a nice job of growing within its existing customer base, with dollar-based net retention of 121%. Any number above 100% means that customers are increasing their spending.

GitLab's growth is largely being powered by large enterprise customers, and it said it expects to see some SMB (small and medium-sized businesses) weakness the rest of the year. The number of customers with $100,000 or more in ARR jumped by 25% to 1,344.

GitLab's adjusted EPS, meanwhile, soared 60% to $0.25. Its gross margin came in at 88%, the same as a year ago.

The company produced $46.5 million in adjusted free cash flow in the quarter compared to only $10.8 million a year ago. It finished the quarter with nearly $1.2 billion in cash and short-term investments and no debt.

Looking ahead, GitLab maintained its full-year fiscal 2026 forecast for revenue of between $936 million and $942 million, representing about 24% growth. However, it did once again boost its EPS guidance, taking it to $0.82 and $0.83, up from an earlier forecast of $0.74 to $0.75.

For fiscal Q3, it guided for revenue to be between $238 million and $239 million, representing approximately 23% growth. It is looking for adjusted EPS in a range of $0.19 to $0.20.

Should investors buy the dip?

While investors were disappointed that GitLab didn't raise its full-year revenue guidance, they shouldn't be. With the company looking for a new CFO, it had every reason to sandbag guidance. In addition, the company is also in the middle of transitioning its go-to-market approach.

While there is a narrative that AI could hurt GitLab's business, the opposite has been true. Instead of AI leading to fewer coders, it has led to more software development. Meanwhile, I really like the idea of the company adopting a hybrid seat-plus-usage-based mode, as I think that should be a nice growth driver.

Looking at valuation, the stock is dirt cheap given the type of revenue growth it is seeing. The stock trades at a price-to-sales multiple of just 6.6 times fiscal year 2027 (ending Jan. 2027) analyst estimates, and excluding its net cash, its enterprise value-to-sales ratio is only about 5.6 times.

While software-as-as-service (SaaS) stocks are out of favor, GitLab looks like a screaming buy at these levels. It's growing quickly, has robust margins, a fortress balance sheet, generates a lot of cash, and is seeing its profitability soar. It would also be a great tuck-in acquisition for a cloud computing company like Alphabet or Amazon.

As such, I'd be a buyer on this dip.

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Geoffrey Seiler has positions in Alphabet and GitLab. The Motley Fool has positions in and recommends Alphabet, Amazon, and GitLab. The Motley Fool has a disclosure policy.