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

Shares of GitLab (NASDAQ: GTLB) sank after the company issued conservative guidance. The stock is now down more than 20% on the year.

However, the sell-off looks overdone for a company that has consistently delivered strong revenue growth and increasing profitability.

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Strong revenue growth continues

For those unfamiliar with GitLab, it operates a DevSecOps (development, security, and operations) platform that helps customers develop software while embedding cybersecurity features into all stages of the process. The company has been an artificial intelligence (AI) beneficiary, as AI has led to customers increasing their software development. The company has also been seeing customers flock to upgrade to higher-tier platforms and GitLab Duo, an AI assistant that provides coding suggestions and automation to help speed up development.

Image source: Getty Images.

Gitlab said the big advantage of its solution is that it works within all cloud providers as well as in air-gapped environments, which are highly sensitive settings that have no access to outside networks. It said that security continues to be a key driver of adoption for its Ultimate tier, with new tools giving customers better visibility into risks to allow them to focus on what matters most, the code. Gitlab's Ultimate tier now represents 52% of total annual recurring revenue (ARR).

On the AI side, it is now including GitLab Duo with both its Premium and Ultimate tiers, making it easy for developers to get started with chat and code suggestions right out of the gate. It is also now offering Duo Enterprise to Premium users, which it thinks will help expand its total addressable market. In Q1, it saw a 35% increase in customers purchasing Duo for the first time. It added that it is on track to launch its agentic AI solution, GitLab Dual Workflow, this winter.

These dynamics once again led to GitLab producing strong quarterly revenue growth. For its fiscal 2026 Q1 (ended April 30, 2025), revenue jumped 27% year over year to $214.5 million. That was ahead of the company's prior forecast for revenue between $212 million and $213 million. It was the seventh straight quarter that GitLab has seen revenue growth of between 25% to 35%.

Data source: GitLab earnings reports.

Subscription revenue climbed 29% to $194.5 million, while license revenue rose 11% to $20 million.

The company continues to do a great job expanding within its existing customer base. Its dollar-based net retention was 122%. This metric measures the spending of existing customers after churn, with a number over 100% indicating that customers are increasing their spending. GitLab said seat expansion was responsible for 80% of the increase, improved customer yields contributed 5%, and upgrades to higher-tier platforms represented 15% of the rise.

GitLab also continues to see strong growth with its enterprise customers. The number of customers with $100,000 or more in ARR increased by 26% to 1,288.

Remaining performance obligations (RPO) soared 40% to $955.1 million, while cRPO (current RPO) jumped 34% to $584.8 million. RPO includes both revenue received from upfront payments that have yet to be recognized as revenue, as well as revenue from un-cancellable contracts. These metrics are supposed to be an indication of future growth, and some investors likely were disappointed that the strength in these metrics did not translate into increased revenue guidance.

On the profitability front, GitLab's adjusted earnings per share (EPS) surged from $0.03 a year ago to $0.17. It had a gross margin of 88% in the quarter. The company generated $104.1 million in adjusted free cash flow in the quarter compared to only $37.4 million a year ago. It ended the quarter with $1.1 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. It boosted its adjusted EPS guidance to between $0.74 and $0.75, up from a prior outlook of between $0.68 and $0.72. For fiscal Q2, it forecast revenue of between $226 million and $227 million, representing growth of around 24%. It is looking for adjusted EPS in a range of $0.16 to $0.17.

Time to buy the dip?

While investors have sold off GitLab stock this year, there is a lot to like about the stock. While there is a narrative that AI could lead to the need for fewer coders -- and less need for GitLab's solutions -- thus far, the opposite has been true. Its customers have been writing more code and expanding seats with GitLab while upgrading to its high-tier platforms.

This has led the company to see consistent 25% to 40% quarterly revenue growth over the past two years. It has nearly 90% gross margins, and it's seeing its profitability skyrocket. On top of that, it's starting to generate strong free cash flow and has a rock-solid balance sheet with over $1 billion in cash and no debt.

Take out the AI as a threat narrative, and investors would be falling over themselves for a stock with those underlying metrics. Instead, the stock trades at a price-to-sales multiple of 7.5 times fiscal year 2026 analyst estimates. Excluding its net cash, its enterprise value-to-sales ratio is only about 6.4 times.

Overall, GitLab is a fast-growing software-as-as-service (SaaS) company flush with cash with high gross margins and strong free cash flow. While the risk of AI disruption is possible, thus far, there has been no indication that this is happening. Instead, the company is benefiting from AI. That makes the stock a buy.

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