GitLab Is Starting to Prove the Bears Wrong

After turning in another solid quarter, GitLab (NASDAQ: GTLB) is starting to prove the bear case wrong, and its stock is finally beginning to reflect that, with its shares climbing on its latest report.

The DevSecOps (development, security, and operations) company not only reported results that topped expectations and issued upbeat guidance, but its new annual recurring revenue (ARR) also grew at its fastest pace in several years. This is an indication that its core growth trajectory is reaccelerating.

Let's dig into the company's results and prospects to see why I think this growth stock remains a buy.

GitLab starts to flex its strength

GitLab turned in some impressive underlying metrics in the third quarter, led by its new ARR surging 42% year over year, its second-highest rate in the past four years. Its calculated billings rate, meanwhile, jumped 24%, which was double the growth rate it saw last quarter, and it said its sales team delivered its largest gross bookings ever. Its first-order count more than doubled to 1,700, while first-order ARR rose 39%. Meanwhile, its dollar-based net retention remained strong at 117% over the past 12 months, showing the first sequential improvement since 2024.

Long pegged as a loser amid the rise of artificial intelligence (AI), the company is starting to thrive in the current landscape. Management noted that AI is significantly lowering the bar for software development, which is helping drive demand for its platform and services. In addition, AI is giving GitLab more opportunities to monetize the growing amount of work occurring across the software life cycle.

The company recently introduced its Flex model, which lets customers commit to an annual dollar rate that it can shift between seats, consumption credits, and new capabilities. It expects this model to improve retention and drive growth, although it will have some revenue-recognition impact. It currently thinks that for every $50 million converted to Flex, it would lead to $5 million of revenue being recognized in future periods. Since its introduction six weeks ago, the company has already seen customers commit over $20 million to the program.

Turning to GitLab's results, overall revenue jumped 21% year over year to $286.3 million. That was well above the company's guidance for sales of $272 million to $274 million. Subscription revenue also increased by 21% year over year to $258.3 million, while license revenue rose by 20% to $27.9 million.

The company continues to see strength with its largest customers. Deals of $500,000 or more grew by more than 150% in the quarter. Sales of its high-end Ultimate tier, meanwhile, jumped 35% and now accounts for 59% of its ARR. It also said it saw a rebound in the public sector, which had been struggling.

Management once again upped its full-year guidance and now expects full-year fiscal 2027 revenue of $1.129 billion to $1.133 billion, representing growth of 18% to 19%, and adjusted earnings per share (EPS) in the range of $0.85 to $0.87. That's up from a prior forecast for revenue of $1.112 billion to $1.118 billion and adjusted EPS of $0.79 to $0.82.

For the fiscal third quarter, it forecasts revenue to be between $281 million and $283 million, representing 15% to 16% growth. It guided for adjusted EPS between $0.19 and $0.20. The company said it has not adjusted its guidance yet for the potential impact Flex could have on growth.

Image source: The Motley Fool.

The stock still looks like a buy

While off its lows, GitLab's valuation remains attractive. The stock is trading at a forward price-to-sales multiple of under 6.5 based on analyst estimates for fiscal 2028 (ending January 2028), despite the company growing its revenue around 20% and having over 15% of its market cap in cash.

Most importantly, the underlying metrics point to a business that is about to reaccelerate. While Flex will cause some distortions, that should not impact how investors view the stock. As such, I still consider it a buy even after its rebound.

Geoffrey Seiler has positions in GitLab. The Motley Fool recommends GitLab. The Motley Fool has a disclosure policy.