Is It Time to Buy These 2 AI Growth Stocks Ahead of a 2025 Breakout?

In the fast-evolving tech landscape, artificial intelligence (AI) continues to be a game-changing force, particularly in the realm of software development. As we approach 2025, two AI-driven growth stocks, Atlassian (TEAM) and GitLab (GTLB), are emerging as prime candidates for investors looking to capitalize on the next wave of technological innovation. 

Brokerage firm Bernstein recently noted that the latest generative AI copilots from Atlassian and GitLab could act as a growth catalyst upon their release. In particular, “Atlassian’s and GitLab’s soon-to-be-released Gen AI copilots may be an important solution to the developer productivity bottleneck,” said Bernstein analysts, led by Peter Weed, in an investor note last Monday.

GenAI copilots have been quickly and widely adopted by developers, with Bernstein finding that over 80% of developers have used ChatGPT for coding support, and more than 40% have utilized GitHub Copilot. Notably, Atlassian Rovo and GitLab’s self-hosted Duo offerings are anticipated to be released or detailed later this month. Bernstein analysts said that if adoption rates mirror those of other copilots, it could contribute a modest 1-2% boost to topline growth for the current fiscal year, and potentially even more in the following fiscal year.

In this article, we will delve into why TEAM and GTLB are two AI growth stocks worth considering ahead of their potential breakout in 2025. 

1. Atlassian Corporation

Atlassian Corporation (TEAM) is an Australian software company that has been at the forefront of innovation in team collaboration and productivity tools. Founded in 2002, the company has expanded from a small startup to a global enterprise, renowned for a range of popular products such as Jira, Confluence, and Trello. Its market cap currently stands at $48.6 billion.

Atlassian estimates its total addressable market at $67 billion, growing at an annual CAGR of 12%, segmented into $17 billion for software development (9% annual growth), $15 billion for service management (13% annual growth), and $35 billion for work management (14% annual growth). The company’s distinctive business model, combined with its strategic emphasis on cloud migration and artificial intelligence, positions it well to take advantage of the increasing demand for digital workplace solutions.

Still, TEAM stock has underperformed in 2024, and is down around 21% on a year-to-date basis.

Atlassian Stock Plunges as Q1 and FY25 Revenue Guidance Disappoints

Atlassian Corporation reported its financial results for the fourth quarter of fiscal 2024 on Aug. 1. Its total revenue grew 20.3% year-over-year to $1.13 billion, in line with Wall Street’s expectations. The revenue growth was primarily driven by the Cloud and Data Center segments, which accounted for over 95% of total revenue. Notably, revenue from the Cloud segment increased by 31% year-over-year to $738 million, fueled by the expansion of paid seats among existing customers, migration, and cross-selling of additional products. Revenue from the Data Center segment rose 41% year-over-year to $326 million, driven by prior-period Server migrations, expansion within existing customers, and price increases. TEAM posted Q4 adjusted EPS of $0.66, beating the consensus estimate.

It’s also worth noting that Atlassian finished its fourth quarter and fiscal year 2024 with 45,842 customers and more than $10,000 in Cloud annualized recurring revenue, representing an 18% increase year-over-year. Also, the number of Atlassian customers spending over $1 million annually increased by 48% year-over-year to 524, highlighting the company’s growing momentum in serving enterprise customers while maintaining its uniquely efficient go-to-market model.

As previously mentioned, management noted that their total serviceable market is valued at $67 billion, and their enterprise customer base holds a revenue potential of $14 billion. This is particularly notable, as 84% of Fortune 500 companies are already Atlassian customers but account for just 10% of total revenue, indicating significant room for growth by enhancing enterprise-grade capabilities and implementing targeted go-to-market strategies.

The company continues to roll out new products from its Point A incubator program, including Jira Work Management, Jira Product Discovery, Compass, and Atlas. AI has also emerged as a significant focus area for TEAM. Launched a year ago, the company’s AI offering, Atlassian Intelligence, has attracted over 30,000 customers, with its monthly active users tripling since December 2023. In addition, the launch last spring of a new AI-powered product for enterprise search and knowledge discovery named Rovo demonstrates the company’s commitment to utilizing AI to boost workplace productivity.

At the same time, a concerning issue emerged in the company’s report regarding margin compression. Atlassian experienced a 200 basis point reduction in its adjusted operating margin year-over-year, bringing it down to 20%. This, along with below-consensus revenue guidance for FQ1 and FY25, contributed to the stock's post-earnings decline of about 17%. Notably, the company projects its FQ1 2025 revenue to be between $1.149 billion and $1.157 billion. For fiscal year 2025, TEAM anticipates a year-over-year revenue growth of approximately 16%. 

Atlassian stated that the outlook was based on two primary factors. “First, given the uncertain macroeconomic outlook, we have accounted for macro-related factors that negatively impact key growth drivers across our business such as seat expansion, cross-sell, upsell, and customer retention,” TEAM noted. “Second, our outlook also allows for execution risk in the ongoing evolution of our enterprise go-to-market motion, particularly given the upcoming transition in sales leadership,” the company added.

Analysts tracking the company forecast a 9.03% year-over-year rise in its adjusted earnings to $3.19 per share for fiscal 2025. Also, Wall Street expects TEAM’s revenue to grow 16.27% year-over-year to $5.07 billion in FY25.

In terms of valuation, the stock is trading at 58.56 times forward adjusted earnings, more than double the sector median of 24.33x, yet still well below its own five-year average of 136.68x. The same trend is evident with its forward EV/Revenue multiple, which is the key multiple used in this space. TEAM is trading at 9.38x, higher than the sector median of 2.88x, but lower than its five-year average of 20.06x.

What's the Analyst Consensus on TEAM Stock?

On Oct. 11, Morgan Stanley analyst Keith Weiss raised his price target on Atlassian to $224 from $216, and kept an “Overweight” rating. The analyst also designated Atlassian as a “Top Pick.” While a “disappointing” fiscal 2025 sales forecast contributed to already negative investor sentiment, it “creates a compelling entry point for long-term investors,” the analyst explained in a research note.  The firm stated that an expanding opportunity from Atlassian's broader product portfolio against “de-risked” estimates “sets a clear catalyst path to drive shares higher.”

On Oct. 10, Canaccord analyst David Hynes raised TEAM's price target to $225 from $200 and maintained a “Buy” rating. The analyst, after attending investor meetings, concluded that FQ1 could serve as a moderate catalyst for the stock, particularly in strengthening conviction in this year’s Cloud guidance. Additionally, as investor confidence is restored, the analyst thinks there's a pathway to a higher valuation multiple for the stock.

On Oct. 1, Raymond James analyst Adam Tindle upgraded the stock to “Outperform” from “Market Perform” with a $200 price target, citing “a favorable risk/reward” at current levels. Management has set a target for company growth at 20% over the next three years, representing the “bull case at elite software comps” that trade at low double-digit to mid-teens enterprise value to sales, which translates to a $300 per share price for Atlassian, according to Raymond James.

Analysts have a consensus rating of “Moderate Buy” on TEAM, with a mean target price of $212.38, which indicates an upside potential of about 13.5% from Friday's close. Out of the 24 analysts covering the stock, 14 recommend a “Strong Buy,” one advises a “Moderate Buy” rating, and the remaining nine recommend a “Hold.”

2. GitLab Inc.

Valued at $8.8 billion, GitLab (GTLB) is a California-based company that provides a cloud-based DevOps platform. This platform combines the version control system Git with continuous integration/continuous delivery (CI/CD) tools, among other functionalities, enabling software development teams to manage the entire software development lifecycle.

The company anticipates capturing a significant portion of the market by transitioning from multiple specialized single-function software design tools to an integrated platform of DevOps tools. Several analysts, such as those from Gartner and Forrester, rank it as one of the top DevOps Platforms.

Shares of GitLab have dropped about 13% year-to-date.

GitLab Stock Surges After Q2 Earnings Beat, FY25 Guidance Raise

On Sept. 4, GitLab stock rallied over +21% after the DevOps company posted upbeat Q2 results and boosted its full-year forecast. 

GitLab’s second-quarter revenue rose 31% year-over-year to $183 million, fueled by new logos such as Delaware North and Guild Mortgage, along with expansion by existing customers, surpassing analysts’ estimates by $5.45 million. The company also experienced a significant year-over-year improvement in operating leverage, with adjusted operating income reaching $18.2 million, compared to a loss of $4.3 million in the same quarter last year. Importantly, the operating margin significantly surpassed management’s expectations for the quarter, rising by over 1,300 basis points year-over-year to 10%. Its adjusted earnings per share came in at $0.15, beating analysts’ estimates by $0.05.

The number of GitLab’s base customers, defined as those exceeding $5,000 in Annual Recurring Revenue (ARR), increased to 9,314 in the quarter, a 19% year-over-year rise. However, management noted that they track the performance of a larger customer cohort with over $100,000 in ARR, which reached 1,076 in the quarter, marking a 33% increase year-over-year. In fact, over 65% of new dollars invested by this cohort was in the Ultimate tier in Q2. Notably, Ultimate represents the company’s highest pricing plan.

GitLab’s second-quarter dollar-based net retention rate (DBNRR) was 126%, a metric the company uses to define its ability to retain and upsell existing customers. GitLab’s DBNRR was fueled by a mix of seat expansion, increased customer yield, and tier upgrades. This figure is crucial as the market evaluates subscription businesses based on this metric, meaning that a higher DBNRR leads to a higher valuation for the company. The DBNRR of 126% indicates that customers from the previous 12 months are generating 26% more revenue than they did last year. However, it is important to note that the DBNRR decreased sequentially from 129% in Q1 to 126% in Q2, suggesting that the company would need to acquire a greater number of new logos to offset the churn.

GTLB’s total Remaining Performance Obligations (RPO) increased by 51% year-over-year to $747.9 million, indicating that the company is securing larger deals with longer contract durations. Its current RPO (cRPO) grew 42% year-over-year to $475 million. Since cRPO represents revenue that the company anticipates earning from customers within 12 months, faster growth in cRPO compared to revenue could potentially indicate an acceleration in revenue.

GitLab’s recent advancements in AI tools are generating excitement among its customer base, as businesses increasingly seek ways to improve productivity and security in their software development processes. Management emphasized that customers are particularly enthusiastic about GitLab Duo, which has delivered significant benefits. These include up to a 90% reduction in time spent on toolchain operations, 50% faster lead times, and 50% quicker vulnerability detection, showcasing the meaningful impact of the AI-driven platform. During the quarter, the company also launched GitLab Duo Enterprise, priced at $39 per user per month. Management cited Barclays, F5, and KeyBank as examples of customers who, in the quarter, purchased GitLab Duo seats and additional Ultimate licenses to adopt AI.

Looking ahead, management raised its FY25 forecast, now expecting sales to range from $742 million to $744 million, an increase from the previous projection of $733 million to $737 million. Also, adjusted earnings per share are anticipated between $0.45 and $0.47, up from a prior range of $0.34 to $0.37 per share.

Analysts tracking the company forecast a 133.9% year-over-year surge in its adjusted earnings to $0.47 per share for fiscal 2025 and expect revenue to rise 28.49% year-over-year to $745.13 million.

Priced at 116.99 times forward adjusted earnings, the stock trades at a substantial premium compared to the sector median of 24.39x. Once again, GTLB’s solid DBNRR of 126% garners a higher valuation for the company. Furthermore, investors should not place too much emphasis on this multiple, given that the company is at a relatively early stage as a subscription business. 

Regarding the price-to-sales ratio TTM, we see a situation similar to that of Atlassian. GTLB is trading at 12.95x, above the sector median of 3.04x, but below its five-year average of 16.43x.

How Does Wall Street Rate GTLB Stock?

On Oct. 9, Morgan Stanley analyst Sanjit Singh initiated coverage of GitLab with an “Overweight” rating and a price target of $70. 

“After decades of fragmentation, the software delivery market is consolidating as the focus on cost and engineering productivity rises,” the analyst wrote in a note to clients. “We see GitLab as a key consolidator in a large market positioning the company as the next enterprise platform story in software.” 

Singh added that as the company continues to capture market share, its revenue is expected to grow at a compound annual rate of 26% through 2027, with margins nearly doubling by that year.

GitLab stock has a consensus “Strong Buy” rating. Of the 25 analysts providing recommendations for the stock, 19 say it's a “Strong Buy,” two suggest a “Moderate Buy,” and the remaining four advise a “Hold.” The mean price target for GTLB stock is $65.30, which is about 19% above Friday’s closing price.

Is It Time to Buy These 2 AI Growth Stocks Ahead of a 2025 Breakout?

To sum up, I believe it would be wise to begin building positions in both companies ahead of 2025. TEAM and GTLB possess strong fundamentals and show improvements across nearly all financial and operating metrics, with plenty of room for further growth. Moreover, both companies have a significant catalyst on the horizon with the upcoming release of their Gen AI copilots, which is expected to positively impact their shares.

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On the date of publication, Oleksandr Pylypenko did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.