We recently compiled a list of the Worst Cloud Stocks To Buy According to Short Sellers. In this article, we will look at where Gitlab Inc. (NASDAQ:GTLB) stands against the worst cloud stocks to buy according to short sellers.

Cloud computing refers to the use of remote servers, typically accessed via the Internet, to store, manage, and process data. A segment of the broader IT services industry, the cloud computing market was valued at $480 billion in 2022, and despite its size, it is projected to grow at a compound annual growth rate (CAGR) of 17%, reaching an estimated $2.2 trillion by 2032 (according to estimates from Precedence Research). Knowing this, it’s no surprise that many of the hottest tech stocks from 2019 to 2021 were tied to cloud computing, with ETFs like the First Trust Cloud Computing ETF surging 71.84% over the past five years.

The largest cloud computing segment is Software as a Service (SaaS), which generates the most revenue in the cloud market and has become the standard for delivering enterprise applications. Common uses of SaaS include customer relationship management, analytics, and artificial intelligence software. The next layer, Platform as a Service (PaaS), provides customers with a platform for application development. Lastly, Infrastructure as a Service (IaaS) offers customers off-site resources such as storage, servers, virtual machines, and networking.

Amid the disruption and excitement surrounding generative AI (GenAI), cloud service providers (CSPs) enable businesses to engage with customers and operate innovatively. With AI Ops and AI tools offered by CSPs, businesses can transform proof-of-concept ideas into production-ready solutions, delivering personalized recommendations, optimizing supply chains, and enhancing customer experiences. Following the launch of OpenAI’s ChatGPT, cloud providers have started utilizing these advancements to unlock new opportunities. Moreover, Tim Potter, a principal at Deloitte Consulting, made the following remarks regarding the relationship between AI and the cloud:

“AI is accelerating the adoption of cloud computing while enabling cloud providers to enhance platform solutions and services. Most AI solutions are either services offered directly by hyperscalers or solutions built on top of a hyperscaler’s cloud infrastructure.”

Another major driver of the cloud industry’s growth is the increasing recognition by large enterprises of its impact on their operations. According to a report by the Cloud Security Alliance, 94% of companies worldwide have already adopted cloud computing solutions this past year. This widespread adoption is projected to have a significant economic impact, with estimates suggesting it could generate around $3 trillion in revenue by 2030.

Although the Magnificent Seven stocks have been in the spotlight since the surge in artificial intelligence excitement, Apple Inc. has recently been making notable advancements in the AI space. Earlier this year, the iPhone-maker unveiled its new artificial intelligence initiative which is set to elevate the cloud to new levels of consumer exposure, with the tech giant moving toward offering on-device AI through a partnership with OpenAI’s ChatGPT platform.

Our Methodology

To compile our list of the 10 worst cloud stocks to buy according to short sellers, we first compiled a list of 20 cloud stocks by sifting through ETFs and online rankings. Then we checked their short interest and selected the 10 with the highest short interest. Finally, we ranked the stocks in ascending order of their short interest. We have also included the hedge fund sentiment for each stock, as of Q2 2024.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Gitlab Inc. (NASDAQ:GTLB)

Short % of float: 3.45%

Number of Hedge Fund Holders: 39

GitLab Inc. (NASDAQ:GTLB) is a web-based SaaS platform offering free open and private repositories, issue tracking, and wikis. As a comprehensive DevOps solution, it supports the entire project lifecycle—from planning and source code management to monitoring and security. Moreover, GitLab Inc. (NASDAQ:GTLB) integrates Google Cloud’s generative AI models to deliver AI-powered features across the SDLC with a privacy-first approach.

GitLab Inc. (NASDAQ:GTLB) recently received an upgraded price target from TD Cowen, now set at $63, up from $58, with a reiterated a Buy rating. This followed the company’s strong second quarter, which saw 31% revenue growth, surpassing the anticipated 27%. The company also raised its full-year revenue guidance to a 28% increase, up from 27%.

Notably, GitLab Inc. (NASDAQ:GTLB) reported a 42% growth in billings for Q2, the highest since Q1 2024, far exceeding analyst expectations. Additionally, the company was named a Leader in the 2024 Gartner Magic Quadrant for AI Code Assistants and retained its Leader status in the 2024 Magic Quadrant for DevOps Platforms.

As of Q2 2024, 39 hedge funds held a total of 5.07 million shares in the company, with HMI Capital owning the largest stake, valued at $252.4 million.

Baron Discovery Fund stated the following regarding GitLab Inc. (NASDAQ:GTLB) in its Q2 2024 investor letter:

“We are huge believers in the practical uses of AI, and we have several investments in companies that adapt AI models to enhance their products and services. These include companies like GitLab Inc. (NASDAQ:GTLB), SentinelOne, Inc., and Couchbase, Inc., which were among our top detractors at one point in the second quarter (GitLab and SentinelOne recovered significantly in the last week of the quarter). As of the second quarter at least, the market has just not been ready to reward AI companies beyond those providing “picks and shovels.” This led to all three of these companies trading at or near all-time low valuation levels during the quarter. Nevertheless, we believe that in the coming quarters the market will broaden its level of interest from AI hardware to “adaptive AI” investments like GitLab, SentinelOne, and Couchbase. In that scenario, all three of these stocks have significant upside potential.

GitLab is a subscription software company that enables enterprise software developers to develop new software applications rapidly and securely for their firms. GitLab uses AI to help with code suggestions, to check for holes in security, and to automate collaboration among the many developers within an enterprise. GitLab recently launched a product called Duo that we believe will provide revenue upside for the company and enhance the competitiveness of their product of offerings. SentinelOne is a cybersecurity company that provides endpoint protection (a much more advanced version of legacy “anti-virus” software) both at customers’ physical sites and in the cloud. It uses AI to detect anomalous behavior on the network and to automate the remediation of the security flaws that led to the intrusion. Both companies are recurring revenue entities, with high gross margins (78% for SentinelOne and 90% for GitLab) and are growing rapidly (revenue growth of 25% or more). Yet both are trading at or near all-time low valuation levels. GitLab shares dropped 14.7% in the quarter despite raising full-year revenue and earnings guidance. This was partly due to a health issue with the CEO (cancer recurrence which he believes is very treatable). We see GitLab revenues growing at a compounded rate of 26% through 2028 with free cash flow growing five-fold over current levels. Again, we see the stock doubling over this time.”

Overall GTLB ranks 9th on our list of the worst cloud stocks to buy according to short sellers. While we recognize the potential of GTLB as an investment, we believe certain deeply undervalued AI stocks offer greater prospects for higher returns in a shorter period. If you’re seeking an AI stock with even more promise than GTLB and trading at less than 5 times its earnings,  check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published on Insider Monkey.