GitLab (US:GTLB) shares are on fire in Tuesday’s pre-market activity, with GTLB stock up 26% hours before U.S. markets open.

The tech maker reported impressive first quarter results on Monday afternoon, stoking a near-5% rise. The software development tools platform exceeded expectations, reporting a staggering 45.2% year-on-year increase in revenue, reaching an impressive $126.9 million. 

Both subscription and license revenues posted solid growth of 44.5% and 49.6%, respectively, over the prior year.

The company's financial performance was undoubtedly a breath of fresh air for investors, who had previously expressed concerns about the reduced outlook for fiscal 2024, coupled with an impending price increase. However, GitLab proved the naysayers wrong by delivering a beat and raise quarter, outperforming expectations across multiple metrics.

Big Beat

GitLab's revenue beat analyst estimates by 7.7%, marking the widest margin in the past year. Additionally, the company's underlying non-GAAP per share loss 6 cents surpassed the consensus estimate of a 14-cent loss. 

These impressive numbers reflect the company's strong growth trajectory and its ability to capitalize on the increasing demand for software development tools.

The chart below from Fintel’s financial metrics and ratios page for GTLB shows the growing level of sales in recent years.

The positive outlook continues for GitLab, with the company lifting its revenue guidance for the full year. The midpoint of the new guidance stands at $542 million, representing a 2.07% increase from the previous estimate of $531 million. This upward revision demonstrates GitLab's confidence in its ability to roll out price increases and defend market share.

AI Focus

One significant driver behind GitLab's success is its focus on artificial intelligence (AI) capabilities. The company recognizes the transformative power of AI in software development and has swiftly embedded AI features into its platform, positioning itself as a leading AI-powered DevSecOps platform. GitLab's commitment to incorporating AI into its offerings has garnered attention and solidified its position in the market.

With more than 30 million users, GitLab possesses an abundance of data that can be used to train AI models. The company already boasts about 10 AI features in the market, enabling users to leverage AI to enhance their DevOps processes with coding suggestions. GitLab's open-source-driven research and development model has accelerated the incorporation of AI, further strengthening its competitive advantage.

Balance Sheet Growth

Despite negative free cash flow in the last quarter, GitLab's robust balance sheet provides ample room for growth. With a market capitalization of $5.16 billion and over $937.6 million in cash, the company can prioritize expansion and innovation over short-term profitability.

Fintel’s analysis of management effectiveness indicates that since the company listed in 2021, performance has shown steady improvements. While traditional analysis measures of ROA, ROE and ROIC are almost at break-even levels turning positive, the CROIC (cash return on investor capital) shows that quarterly performance was deteriorating in the later stages of 2022 and early 2023.

Trends are expected to improve in the coming year with the improving guidance.

Analyst Thoughts

UBS analyst Karl Keirstead raised his ‘buy’ call target price on GTLB stock from $35 to $50 after GitLab beat/raised and offered a detailed monetization plan for its AI auto-coding tool Code Suggestions.

The analyst thinks that demand might have stabilized now and also highlighted that even with the after market price, the stock still looks reasonable given the AI-related total addressable market.

With today’s pre-market move, the GTLB stock price will likely reach Fintel’s consensus 12-month target price of $46.41 shortly. We expect this consensus target price will drift higher in the coming days as analysts update valuations.

Options Sentiment Improving

Fintel’s dashboards also reveal improving investor sentiment in the options market, evident in a falling Put/Call ratio in recent months, as shown in the chart below. 

A falling ratio indicates that the level of put option (bearish) demand in the market is falling relative to call option demand (bullish). The current ratio of 1.33 has spiked in recent days with the optimism leading into results as wary holders looked to hedge their positions.

While torrid trading today will likely add a significant premium to the stock’s valuation at the open, GTLB will still be trading at less than half of the $100 per share that investors were paying in the aftermath of its 2021 initial public offering.