Episode Details

GitLab (GTLB) Q2 FY2027 — Shares closed at $49.59 on September 2, up 9.98% on the print - but they opened at $55.20 and handed back more than half the move before the close, on 28.9M shares against a 5.4M daily norm. GitLab's revenue rose 21.3% to $286.3M and beat its own guide by $13.3M. Gross profit grew only 16.0%. Gross margin fell to 84.1% from 87.9% - the SIXTH consecutive quarterly decline, 513 basis points over eighteen months. The 10-Q names the cause in its own words: of the $17.1M rise in cost of revenue, $11.0M was 'third party hosting costs for SaaS and cloud usage', and another $3.4M and $3.6M of the same hosting sits in selling and engineering. That is $18.0M of the $50.3M of new revenue - 36 cents in every new dollar - going straight back out as rented compute. The marginal gross margin is 66% against 84% on the average book, and subscription cost of revenue grew 75.9% against subscription revenue up 21.5%. Demand is fine and we say so. The problem is that FY2027 adjusted free cash flow of about $240M sits against $255M of stock compensation, so the owner's cash is negative. Our fair value is $23.50 and we rate GitLab a SELL against a $49.59 close. THE CALL: SELL (3/5, MODERATE) — base-case value ~$23.5 vs ~$49.59 today. KEY METRICS: - Revenue $286.3M +21.3%, $13.3M past the guided midpoint; gross profit $240.6M, up only 16.0% - Gross margin 84.1% vs 87.9% - the sixth straight quarterly fall (89.2 to 84.1, 513bp since Q4 FY2025) - 10-Q: $11.0M of the $17.1M cost-of-revenue rise is 'third party hosting costs for SaaS and cloud usage' - Add $3.4M in selling and $3.6M in engineering: $18.0M of hosting against $50.3M of new revenue = 35.8% - Marginal gross margin 66% against 84.1% on the average book - Subscription cost of revenue +75.9% against subscription revenue +21.5% - Non-GAAP diluted EPS $0.24 vs the $0.18 bar; GAAP a LOSS of $0.22 - a $0.46 per-share gap, $75.0M of it stock comp - EPS basis PROVEN: Q1 $0.23 + Q2 $0.24 = the filed six-month $0.47; $42.093M over 173.949M shares = $0.24 - The JiHu minority earned +$0.712M, so the loss owned by shareholders is $(36.844)M, worse than the group's $(36.132)M - Receivables swung $61.2M against a $52.5M fall in operating cash flow; DSO 82.0 days vs 76.5 - FY2027 modelled: revenue ~$1,151M +20.5%, adjusted operating margin 15.2% vs 17.0% last year - Stock compensation ~$255M = 22.2% of revenue; operating margin after grants is MINUS 6.9% - Adjusted free cash flow ~$240M less $255M of grants = MINUS $16M of owner's cash - $1,257M of cash and investments, zero borrowings; $7.27 a share of net financial assets after the minority - Fair value $23.50 = 60% of a DCF charging stock comp in full ($19.49) + 40% at half rate ($29.55); ignored entirely it is $37.33 - Reverse DCF: the $49.59 close needs a 48% terminal operating margin AFTER grants - GitLab has never posted a positive one What to watch: One flat gross-margin quarter breaks the six-quarter run and we would say so; a marginal gross margin back above 75% would mean the new pricing is finally catching the compute bill Also on YouTube: @ChargedAlpha DISCLAIMER: For informational and educational purposes only. Not financial advice. Do your own research before any investment decision.