Is Chewy Stock a Buy, Sell, or Hold?

Consumers turned to pets for comfort a few years ago during lockdowns and U.S. pet ownership hit an all-time high of 70%. As a result, the pet care industry’s sales surged, and more than doubled from 2018 to 2024.

Because many brick-and-mortar retailers were closed or had supply-chain issues, pet owners turned to online retailers like Chewy (NYSE: CHWY) to obtain their supplies.

After the company’s initial public offering in 2019, Chewy quickly became the leading pet e-commerce retailer, and its shares traded above $118 in 2021. But following that surge, inflation and high interest rates began to set in, forcing consumers to cut costs, including non-essential items for their pets.

Chewy’s revenue growth slowed down and its stock fell too. CHWY now trades at around $22 per share after an over 40% 12-month decline. However, while the company’s revenue growth isn’t what it was a few years ago, Chewy has still beaten revenue expectations in three of the last four quarters.

More impressively, the company has beaten earnings expectations substantially in the past four quarters, as Chewy has pivoted to offering subscription plans, its private branded products, and expanded pet insurance.

So is Chewy stock a buy, sell, or hold?

Why Did Chewy Stock Go Up?

Investors bought CHWY ahead of the company’s first quarter of 2024 earnings call, driving the share price up by around 32% in the week before the late May release. Despite the jump, CHWY really only returned to where it was to start the year; Chewy stock is up around 2.25% year-to-date.

It was still a solid quarter, as net sales of $2.88 billion represented a 3.1% year-over-year improvement. The company also beat revenue expectations by 1.24%.

Net income of $66.9 million was the standout, a 192.6% increase over last year, and diluted earnings per share came in at $0.15 per share, 58.8% higher than analysts had predicted.

A notable positive for the company is that its AutoShip sales continue to be strong. Customers can subscribe to products on Chewy’s platform and receive discounts on recurring purchases. Autoship is the heart of the company’s business, making up 76.2% of sales in 2023. That number increased to 77.6% in Q1 FY24.

Increased earnings were fueled by a 1.3% increase in the company’s 29.7% margin. The company also announced its intention to buy back $500 million of its Class A and/or Class B stock. That’s around 5% of the company’s $9.96 billion market capitalization.

Even though the company reported strong financials, lost users in Q1 are a concern going forward. The company now has around 20 million customers, down 2% from the same quarter of 2023. Chewy compensated for the loss by increasing net sales per customer by 10% year-over-year.

Will Chewy Stock Keep Rising?

The company forecasted revenue growth of between 4% and 6% in 2024. While there might be concerns that Chewy won’t be able to maintain sales growth if it keeps losing users, the company’s leadership attributed the recent slowdown to inflation.

“Our Q1 outperformance underscores our ability to successfully navigate this period of normalization for the pet industry,” Chewy Chief Executive Sumit Singh said. “Moreover, we are cautiously optimistic that pet household formation trends are progressing in the right direction.”

There are signs that Singh is correct. Freshpet and Petco stocks have both recently surged, giving investors hope that the pet supplies industry could be recovering from the post-pandemic letdown.

That sentiment was echoed by Michigan State University researchers, who recently reported that the pet supplies industry is alive and well. The industry accounted for $303 billion in revenue in 2023, up 16% from 2022.

That trend is expected to carry into 2024, with recent data indicating sales of pet care products are growing three times faster than other consumer goods. Industry revenue growth is expected to be around 3% in 2024.

Is Chewy Stock Undervalued?

A 10 year discounted cash flow forecast model reveals that Chewy stock has upside potential to $41 per share, suggesting it is materially undervalued at this time.

An air of hesitancy still surrounds Chewy, though, as evident by the firm’s price-to-sales ratio of just 0.88. Competitors Petco and Freshpet have P/S multiples of 0.15 and 7.7 respectively.

While Petco may be priced at a lower premium than Chewy on that metric, both pet supply companies are undervalued compared to retailers at large.

None of the three pet stocks, including Chewy, pay a dividend at this time.

Is Chewy Stock a Buy, Sell, or Hold?

Analysts are largely bullish on Chewy stock with 18 of 30 rating it as a Buy. The highest price forecast is $35, around 53% more than where CHWY currently trades.

The average price target is $25.01, which would mean a 9.45% improvement over the next 12 months. There are currently 10 Hold ratings and 2 sell recommendations on Chewy stock. The lowest prediction has CHWY dropping almost 30% to $16 in the coming year.

The main argument for selling Chewy stock is the uncertainty in the pet industry. The company has been able to get more revenue out of its customers, but it’s still losing customers. If inflation persists it is likely to deter consumers from adopting pets.

There are initial signs that the pet industry is turning things around, and that may well be reason enough to hold the stock. Chewy has solid financials but not exceptional ones, and the company might not have a strong enough moat to ward off rivals easily.

From a valuation perspective, Chewy is undervalued on a discounted cash flow analysis and trades at a very low P/S value but the share price is trading very far away from its former highs. 

Management deserves plaudits given their ability to eke out revenue growth in a tough environment, and some signs point to smoother paths up ahead. For example, Chewy has been able to build brand loyalty with its Autoship plans, and revenue has the potential to really ignite if demand returns to the pet care industry. 

For now, Chewy is an interesting stock to keep a close eye on but doesn’t present a compelling reward to risk ratio.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.