What happened
Shares of Gitlab (GTLB 6.78%) pulled back today after the software development company got an analyst downgrade and seemed to respond to weakness in some tech stock peers.
The stock closed down 15.6%.
So what
Gitlab, which operates a DevOps platform that helps organizations increase their return on software development, got downgraded by JPMorgan Chase today. Analyst Pinjalim Bora took over coverage and lowered the bank's rating on the stock from overweight (meaning: buy) to neutral.
The downgrade was largely due to valuation as Gitlab still trades at a price-to-sales (P/S) ratio of roughly 30 even in an environment where software valuations are getting slashed across the board. However, Bora said he has a "fundamental positive bias toward the company" and believed it was well positioned in the DevOps space. With a price target of $63 on the stock, Bora still sees an upside of roughly 25% to Gitlab after today's pullback.
Two high-profile cloud stocks, Okta and MongoDB, also plunged today on macroeconomic warnings, and Gitlab is likely to be responding to that as well. Tech stocks were down sharply for most of the session, with the Nasdaq down as much as 2.3%, though it rallied in the afternoon to finish down just 0.3%.
The reaction to Okta and MongoDB earnings shows that software valuations could still get slashed further, especially if the macroeconomic environment worsens.
Now what
Gitlab went public last October, soaring on its debut. The timing turned out to be good for raising capital but bad for investors, as the stock is now down a third from its IPO price and about 60% from its peak shortly after its debut.
The company will report second-quarter earnings next Tuesday, and investors are likely to be demanding, given the software stock's valuation and the macroeconomic climate. Analysts are expecting revenue of $94 million, up 61% from the quarter a year ago, and a per-share loss of $0.23. Expect the stock to move sharply on the news.
