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December 5, 2023

GitLab (GTLB) Pops on Q4 Results. Sell AppLovin’ (APP).

GitLab (GTLB) Pops on Q4 Results. Sell AppLovin’ (APP).

Shares of GitLab (GTLB) are up about 13% as of midday today after the company delivered another beat-and-raise Q3 highlighted by solid momentum on virtually all metrics. That said, the beat was smaller than last quarter’s. Revenue grew by 32.5% to $149.7 million (5.8% beat) while EPS improved to $0.09 from a loss of -$0.10 in the year-ago quarter and beat by $0.10. That level of profitability is particularly impressive, though a good deal is due to careful cost management and not all to revenue outperformance.

Management talked about how business with larger enterprise customers remains strong, while smaller ones are still a bit weak. This is consistent with commentary from other software companies referencing the “cautious SMB” market. It’s worth mentioning that GitLab implemented a price increase, and that’s expected to help push next year’s revenue numbers higher (for obvious reasons).

For the remainder of the current fiscal year (fiscal 2024), management bumped guidance up by 3% ($17.5 million), roughly twice as much as the $9 million Q3 beat. I think the quarter was very well received by the analysts covering the stock (lots of price target increases), though some seem disappointed that management wouldn’t give fiscal 2025 guidance yet and are wondering about the timing of the impact, contract structures, etc. One potential area to watch – billings were slower this quarter than last.

On balance, it was a good quarter and shares should be rallying. The question is where do they go from here? We’ve enjoyed this pop so let’s move to hold and sit back and let the stock digest the report, then go from there. HOLD

Sell AppLovin’ (APP)

Elsewhere, we’ve seen shares of AppLovin’ (APP) fail to hold on to their gains after the November quarterly report. There are two sides to the debate here, with the bullish side focused on the impressive performance (and potential) of the AXON machine learning tool. On the more conservative side of the coin, there are ongoing concerns that consumer mobile gaming is still not as strong as it has been historically and that AppLovin’s app business (about 50% of revenue) will become more of a drag on growth in the future. With so many other stocks having a cleaner story and “working,” including many in our portfolio, I’m going to let APP go today to take some risk off the table. We’ll take a very modest, single-digit loss on the trade. SELL

Tyler Laundon is chief analyst of the limited-subscription advisory, Cabot Small-Cap Confidential and grand slam advisory Cabot Early Opportunities. He has spent his entire career managing, consulting and analyzing start-up and small-cap companies. His hands-on experience has taught Tyler that the development of a superior business model is the biggest factor in determining a company’s long-term success. Accordingly, his research focuses on assessing the viability of management’s growth strategies, trends in addressable markets and achievement of major developmental milestones.