Dollar General (NYSE: DG) and GitLab (NASDAQ: GTLB) operate in different industries but offer similar value, trading near long-term lows. Both have the potential to reverse course and trend higher in 2025, but only one is a good buy for investors today. The other faces numerous headwinds that will take several quarters to mitigate, if not longer. Here’s a look at one stock to buy and one to sell before the end of the year.
Dollar General: Deeper Discounts Are Coming
Dollar General and the other ultra-low-price brands appear perfectly positioned in an inflationary world but struggle to invigorate growth. Not only are the stores plagued by company-specific issues, but disorganization, clutter, and staffing issues also play a role. If you go there, it’s hard to know what’s for sale for all the mess, and no one wants to buy casually discarded items.
The takeaway for investors is that Dollar General is growing its business in 2024 but failing to keep up with retail industry leaders like Walmart and TJX Companies, which are gaining share. In 2024, consumers are looking for value and quality, which must be improved in most Dollar General product categories, not to mention convenience, which Walmart is happy to provide. Highlights from Dollar General's first half include underperformance relative to consensus targets and industry peers and diminishing guidance.
With interest rates falling, business conditions could improve, but it will be several quarters before the full impact of the 75 bps reduction works its way into the economy. The best-case scenario is that the company gains traction with staffing and inventory management, which is unlikely given the persistent shortage. The labor data has cooled since the peaks but shows healthy labor market conditions and sufficient job supply to keep talented people employed at better locations.
The analysts' consensus sentiment hopes for Dollar General’s rapid recovery, rating it as a Hold. MarketBeat’s reported consensus price target assumes a 30% upside for the market, but it is trending lower and hitting new lows in early December 2024. The low-end range is in the low-$70s, aligning with a recent bottom, but solid support is yet to be seen. The critical target is near $68.50 and may be reached soon.
GitLab Inc., A Leader for the Second Wave of AI
GitLab’s stock price experienced a boom-and-bust with AI because it is well-positioned, but not for the first wave. The first wave is the build-up of infrastructure and training of models, which is helping GitLab today, but less so than others because GitLab is not an infrastructure stock. It is a DevSecOps platform, and, in the words of a respected LLM developer, you can’t do it without GitLab. GitLab’s AI-enhanced tools connect, secure, and assist developers globally, allowing collaborative software development in real time. That’s important because the second wave of AI is a tidal wave of AI applications, and many will be developed using GitLab’s tools.
Results in 2024 are good. The company sustains growth in the 30% range, outperforms consensus estimates, and is profiting. Growth is driven by an increasing client count, growth in large clients, and deepening service penetration. The company reports nearly 10% year-over-year client growth, 33% for its largest client group, and a net retention rate of 126%. The outlook for the next fiscal year is for revenue to grow at a mid-20% pace and another significant margin improvement. Earnings are expected to grow by 40%, and both estimates are likely low.
The analysts' trends are very bullish for GitLab’s market. MarketBeat reports increasing coverage, improving sentiment, and a rising stock price target, which combine to form a strong tailwind. The coverage is up by 65% to 25 analysts; they’ve lifted sentiment to Buy from Hold over the last 12 months, and the price target implies a multi-year high will be set soon. The consensus in early December is just above $67, below the top of the trading range, but the revision trend is bullish and leads to the high end. The high-end range is $80, sufficient for a three-year high. The technical outlook suggests the stock could continue to rise by another $50 in that scenario.
