Notes: GTLB - 1Q25 Overview & Google Acquisition Possibility?

Notes: GTLB - 1Q25 Overview & Google Acquisition Possibility?


  • GitLab's 1Q25 results were solid, but overshadowed by the recent gloomy SaaS sentiment.
  • We discuss the increasing possibility of Google acquiring GTLB for its strategic importance, potential synergies, and alignment with Google's strategy, especially given GTLB's multiple contraction.
  • Potential headwinds include founder control, post-acquisition execution, open-source frictions, enterprise GTM motion, and customer concerns.
  • Overall, the chance remains high, and at the right price, it makes sense for Google to acquire GTLB, but it needs a strong commitment that can resonate with the GTLB's team and customers.

1Q25 Overview

In its recent 1Q25 ER, GitLab ($GTLB) delivered solid performance, generating 33% YoY growth and notable YoY margin improvement. The company's strategic focus on being the most complete end-to-end DevOps platform with prioritization on security, compliance, and AI integration throughout the software development lifecycle, has continued to differentiate its offerings for greater appeal with developers. Here are a few financial highlights:

  • 33% YoY growth vs. 30.4% guidance
  • -2.2% non-GAAP EBIT margin vs. -7.6% guidance
  • 129% NDR
  • 22% FCF margin
  • 35% YoY increase in # of $100k ARR customers vs. a 37% YoY increase in 4Q24
  • FY25 revenue guidance raised by $7m to $735m
  • FY25 non-GAAP EBIT raised $28.5m to $36m

Even the impressive 1Q25 results were not enough to halt GTLB's 20%+ share price decline over the past two weeks. GTLB's stock decline is aligned with the general sentiment toward high-multiple SaaS stocks at present. High profile SaaS names became out of favour in the last week of May, influenced by Salesforce's (CRM) revenue coming in at the low end of the guidance range, and the non-GAAP EPS missing by a couple of cents, along with cautionary commentary on the macro outlook. This prudent macro perspective has been echoed by other management teams, including Cloudflare (NET). Though, GTLB's recent stock decline could also be attributed to founder and CEO, Sid Sijbrandij, announcing he is about to undergo new treatment for cancer returning. According to Sijbrandij, the cancer has not spread but reappeared at the source.

In contrast to other recent macro concerns, GTLB's management sang a different tune, commenting that sales cycles and discounting were consistent to prior quarters. They also mentioned that over half of the 129% NDR emanated from seat expansion, indicating a robust hiring environment for developers, if not the broader employee population. While the leadership note they are macro-cautious, they see strong demand in the upcoming quarters, evident by the company's revenue guide raise for FY25.

On a TTM-basis, GTLB has increased FCF margin from -13% to 13% during the past four quarters - quite a ramp up in profitability - while managing the growth decay better than many others. Yet the stock is down 5% YoY and down 30% YTD. Given the current EV/GP (LTM) of 10.8x, we think GTLB looks attractive for a long-term investment. However, any investment may be cut short due to the possibility of a Google acquisition increasing substantially, given that Google has been increasing its shareholding in GTLB.

Before we dive into the Google acquisition possibility, let's discuss the two catalysts for GTLB's future durable growth and increasing margins, which are 1) increasing enterprise segment penetration, and 2) GitLab Duo, the company's AI offering.

Progress in the former is manifested in the proportion of revenue coming from the Ultimate subscription tier, designed for enterprise customers, which was 46% in 1Q25 vs. 44% in 4Q24 and 42% one year ago in 1Q24. Another data point that indicates strengthening enterprise adoption is the RPO (Remaining Performance Obligations) growth, which was 48% in 1Q25 vs. 37% one year ago in 1Q24. As revenue growth is decelerating while RPO growth is moving in the opposite direction, it suggests GTLB has been landing larger, multi-year deals with large enterprise customers. Growing a greater presence with this less cost-conscious segment will lead to lower churn and help maintain or increase the stellar NDR.

In regards to the latter growth and margin catalyst, GitLab Duo showcases a brave effort to monetize GenAI among some competitors who include copilots for free, and others who haven't yet developed a copilot capability. GitLab Duo is a natural language AI assistant that can provide code explanations, suggestions, auto-completion, vulnerability explanations, and even generate tests, all within the developer's IDE. GitLab Duo also provides the best-suited reviewer to review a developer's code work, based on skills, capabilities, and previous reviews - a very innovative and useful feature in which most DevOps platforms don't provide, or at least not to the level of Duo's sophistication. GTLB have started out quite aggressively with the Duo pricing, making GitLab Duo Pro at $19/user/month which presumably will be most often paired with the Premium tier that costs $29/user/month. So, in essence, GTLB is attempting to almost double the per-user spend with its new AI offering.

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