Fri. Jun 21st, 2024

You might call it a David vs. Goliath story, with a twist. Relative newcomer GitLab (GTLB) — which went public just two years ago — is taking on Microsoft (MSFT) in the rapidly growing field of artificial intelligence, and could well pose a threat to the software behemoth in coming years. Meanwhile, GTLB stock could see consistent quarterly profits as early as next year.


But there’s a big caveat. For one, GitLab has the backing of Google-parent Alphabet (GOOGL). Plus, its growing ties to Google are moving center stage as GitLab’s rivalry with Microsoft intensifies. Microsoft became a rival when it acquired GitLab’s competitor, GitHub, in 2018.

And amid the emergence of “generative” AI, the outlook for GTLB stock has improved as company watchers expect Google will prove to be an important ally.

“From a competitive standpoint, we think GitLab is reasonably well-positioned against Microsoft’s GitHub in GenAI given the breadth of its platform and expanded partnership with Google,” RBC Capital analyst Matthew Hedberg said in a recent note to clients.

Google Buys GitLab Shares

Google’s venture capital arm made two purchases of GTLB stock in 2023. The search giant now owns 2.5% of San Francisco-based GitLab’s outstanding shares. GOOGL stock has gained 58% in 2023.

In May, GitLab said it will use Google’s cloud computing services to offer customers new AI-assisted features in developing software. New generative AI models enable users to create generally high quality text, images, video and computer programming code on their own.

“Codey” is Google’s new AI-driven coding assistant that improves software development by streamlining workflows. Artificial intelligence coding tools will make software development easier and faster.

At a recent Goldman Sachs tech conference, GitLab Chief Executive Sid Sijbrandij said the company is building a Codey-based competitor to Microsoft’s GitHub AI coding assistant.

“We’re partnering with Google on that,” Sijbrandij said. Other cloud projects are also underway.

Microsoft Takes Aim With GitHub

Meanwhile, Microsoft is integrating AI tools into the GitHub platform, thanks to its stake in startup OpenAI.

Many analysts expect Microsoft to get a big boost from its OpenAI partnership. Microsoft is among AI stocks to watch.

In a recent podcast, the head of Microsoft’s cybersecurity business touted GitHub’s capabilities.

“If you go look at GitHub Copilot, I like to say it’s a security tool,” said Charlie Bell, vice president of Microsoft’s security division. It’s a developer tool that’s a great security tool because it can write vulnerability-free code,”

But at UBS, analyst Karl Kierstead holds a buy rating on GTLB stock.

“We’re hesitant to give GitLab a significant multiple premium to peers given the still-early AI story and competitive momentum Microsoft and GitHub have, he said in a recent note. “But (we) believe risks to GitHub Copilot being a ‘GitLab killer’ may be overdone.”

GTLB Stock: Ukrainian Roots

Founded in 2014, GitLab helps customers develop software and deploy new applications in a secure process. Its roots go back to 2011 when Ukrainian software engineer Dmytro Zaporozhets created open-source software collaboration tools.

Living in the Netherlands, Sijbrandij contributed to the open source project in 2012. Sijbrandij and Zaporozhets then cofounded GitLab to develop commercial products for collaborating on source code. In 2015, they got a boost when startup accelerator Y Combinator invested in the company. Y Combinator has produced such tech giants as Airbnb (ABNB) and Dropbox (DBX).

Since its founding, GitLab has been an all-remote company with workers spread around the globe. When the company launched its initial public offering in 2021, it employed 1,350 people in 65 countries.

GitLab operates in a crowded software development market called “DevOps,” for developer and operations. Aside from Microsoft, Atlassian (TEAM) and JFrog (FROG) are formidable rivals. GitLab also competes with privately held Cloudbees.

GitLab has built an end-to-end platform. GitLab’s tools span across project management, source code management, issue tracking, application security testing, deployment, application monitoring and collaboration.

GTLB Stock: A Freemium Business Model

“We see a future where we’re going to be best-in-class in every part of the DevOp life cycle,” Sijbrandij said at the Goldman conference.

He added: “(We aim to) replace every point solution that customers are currently using with something better. We want to be able to host the data and the models that are essential to tomorrow’s applications — be a single software platform for all of R&D.”

GitLab generates most revenue from subscription-based, software-as-a-service products. Free open-source software is still available to programmers.

GitLab has roughly 30 million estimated registered users and more than 1 million active license users. In the July quarter, GitLab started to enforce user limits on its free tier, said a TD Cowen report. Once a company has more than five users, they have to switch to a paid tier.

At times, the company has struggled with its go-to-market strategy in the enterprise technology sector. In July, GitLab brought in Chris Weber as chief revenue officer. Weber had been chief business officer at UiPath (PATH). Earlier, he worked at Microsoft in enterprise sales.

In the July quarter, GitLab posted 1-cent profit on an adjusted basis vs. a 15-cent loss a year earlier. Revenue rose 38% to $139.6 million, beating estimates by 7%.

Profitability Improving

In the July quarter, the company told GTLB stock analysts that it signed its largest-ever deal, a $30 million multiyear deal with a global financial services firm.

Meanwhile, GitLab increased its revenue outlook to 31% growth, up from 28%, for the current 2024 fiscal year. In fiscal 2025, which starts in April, analysts predict adjusted profit of 16 cents vs. a 6-cent loss in fiscal 2024.

“We remain encouraged by traction upmarket and across the DevOps landscape,” said TD Cowen analyst Derrick Wood in a report. “We think that price hikes, new AI (products) and new dedicated cloud (products) will become growing tailwinds in the quarters ahead, along with continued margin expansion.”

GitLab stock has advanced 8% thus far in 2023.

GTLB stock holds an entry point of 54.60. Buy points are prices representing key resistance, and once cleared the stock has a tendency to advance. In addition, GTLB stock holds a Relative Strength Rating of 82 out of a best-possible 99. The stock was added to the IBD 50 stock list after yesterday’s close, entering at #44.

Follow Reinhardt Krause on X, formerly called Twitter, @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.


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