Is Chewy Stock Overvalued?

Americans are mad about their finned, scaled, feathered, and furry kids. Approximately 90.5 million families – 70 percent of households – currently share their home with some sort of critter.

That’s up from just 56 percent of US households who reported pet ownership in 1988. Dogs are most popular, appearing in 63.4 million homes. Cats are a close second, ruling 42.7 million US homes. 

However, cats and dogs aren’t the only adored pets. At least 11.5 million families have freshwater fish, and millions more own small animals (e.g. hamsters and guinea pigs), reptiles (e.g. snakes and lizards), birds, and horses.

Collectively, these creatures need all sorts of supplies, from food and medicine to specialized housing. That doesn’t even touch on the non-essentials, which are sought-after among pet owners. Toys, treats, and pet attire are surprisingly hot commodities. 

In 2010, Americans spent $48.35 billion on their pets. In 2019, that figure was up to $75.38 billion. Granted, some of that goes to veterinary expenses, but a large percentage shows up as revenue for pet retailers. 

Petco, PetSmart, and Pet Supplies Plus might have the brick-and-mortar market cornered, but today’s consumers are all about e-commerce. In that area, Chewy is the winner.

Since the novel coronavirus made in-person shopping taboo, Chewy’s sales – and share prices – have soared. 

For investors, that growth seems promising, but is it artificial? Will its share price drop once COVID-19 is finally conquered? In other words, is Chewy stock overvalued, or is CHWY a good investment? 

Why Chewy Stock Went Up?

Chewy started 2020 around $30 per share, and it hit a high of $70 per share in early September.

Since then, it has come down a bit, but year-to-date growth remains impressive. The speed at which share prices increased is attributed to COVID-19. Stay-at-home and shelter-in-place orders, quarantines, and a general distaste for public spaces pushed many consumers towards e-commerce.

However, Chewy was already increasing its revenue well before the pandemic took over the world economy. For the fiscal year that ended February 2, 2020, management reported sales of $4.85 billion. That’s impressive from a company that started at zero in 2011. 

Chewy Financials

COVID-19 might have pushed consumers to embrace e-commerce more quickly, but the trend towards online shopping was already well-established.

Internet access has become essential rather than discretionary, and internet-enabled mobile devices can be found in nearly every American hand. That means more consumers can make online purchases, and they are taking advantage of that opportunity. 

Consider this: in 2019, US e-commerce sales hit $595.5 billion. That represents an increase of 14.9 percent year-over-year.

In the first half of 2020, e-commerce sales were already at $371.9 billion, which is 30 percent higher than the same period in 2019. 

Chewy’s financials mirror the rise of e-commerce, which is reflected in stock prices. In the last fiscal year, sales grew by 37 percent over the prior period, and management expects the rapid growth to continue in fiscal 2020. Projections call for sales to increase by 40 percent year-over-year, totaling $6.80 billion. 

From a consumer perspective, it is clear that there is an appetite for transitioning from brick-and-mortar pet stores to the convenience of e-commerce.

Chewy increased its customer base 27 percent total for the last fiscal year, but the pace of new accounts quickened in 2020. During the first fiscal quarter, Chewy increased customers by 33 percent year-over-year, and that went up to 38 percent for the second fiscal quarter. 

Other key figures for the fiscal second quarter (announced September 10, 2020) include earnings per share, which was still in the negative at ($0.08)/share. However, that’s far better than the expected loss of ($0.15)/share. It’s worth noting that revenues came in at $1.70 billion for the quarter, which exceeded the expected $1.64 billion.

Is Chewy Valuation Too High?

Chewy’s stock prices hit their high just before the earnings announcement, then leveled to something more sustainable. It’s safe to say that at $70 per share, Chewy’s valuation was too high.

While the company certainly shows a lot of potential, buying at that price at that time would have been less than ideal. 

At today’s more realistic prices, most analysts agree that Chewy’s valuation is just where it needs to be. In general, e-commerce is growing, as is the pet industry, and Chewy is well-positioned to benefit from both.

According to the American Pet Products Association, 2019’s billions in spending on pets is nowhere near the top of the market. Those figures are expected to grow a minimum of 5.1 percent per year through 2024, totaling an estimated $122.7 billion that year. 

In 2014, roughly 7 percent of those sales were made through online channels. That figure grew to 22 percent in 2019.

Company management estimates that by 2024, 35 percent of pet-related sales will take place through e-commerce. Given that Chewy controls a large portion of online market share – perhaps 40 percent – all signs look good for long-term success.

Is Chewy Stock Overvalued? The Bottom Line

Chewy stock may have some ups and downs in coming months, but that’s normal for any company. The sort of drop that makes investors lose sleep already happened in early September.

The consensus is that Chewy is priced just where it needs to be, and those that buy in now can look forward to significant upside potential.

Of course, any investment carries risk, and shares may always lose value, but Chewy appears less risky than less-established online retailers. In other words, at current prices, Chewy stock is a buy for longer term investors.

However, financial analysts who like to dig deep into the numbers may be interested to know that a discounted cash flow forecast places the current CHWY fair market value at $45 per share. Share prices above that level would suggest that the company is overvalued.

A general rule of thumb for new buyers is to wait until a 20% margin of safety is attainable, meaning when the share price is about 20% below the fair market value, the risk of investing is significantly diminished versus when the price is elevated above that level.

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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.