1 Pet Stock Set to Bounce Back

Over the last few years, American pet owners had the opportunity to spend more time at home with their furry friends than ever before. This led to a rapid growth of spending on pet care products. One of the prime beneficiaries of this was online pet retailer Chewy (NYSE:CHWY).

 

More recently, Chewy has faced substantial headwinds, leading to drastic declines in share prices. Now, Chewy may be set for a rebound, and investors who take advantage of current prices may see strong returns as a result. Here’s what you need to know about Chewy and its potential to bounce back.

 

Chewy’s current difficulties are primarily a result of slowing customer growth as the pandemic winds down and supply chain issues. These two problems have led the stock to fall by about 65 percent from the highs it saw in 2021. For Chewy, however, the worst parts of the drawdown may already be over.

 

The strongest case for a Chewy rebound is management’s plan to gradually raise prices in order to meet rising costs. In conjunction with this, the company will also explore cost-cutting measures. Together, these efforts should help Chewy to improve margins going forward.

There’s also a strong argument to be made that Chewy is seeing a one-time dropoff as customers who subscribed in the early days of the pandemic begin to fall away. While certainly not positive, it’s important for investors not to mistake a potential one-off event for a broader trend in the company’s business.

 

It’s also important to note that Chewy is positioned as an innovative company at the center of a growing market. Even before the tailwinds that ignited growth over the past few years, Chewy was benefitting from American consumers’ shift toward treating pets more like children and spending more on them.

 

A prime example of this shift comes in the market for premium and prepared pet foods. That market is already worth $1 billion, and Chewy expects to eventually have a total addressable market of $3 billion in this space.

 

Chewy’s latest earning report was far from an overwhelming success, and the stock saw a further drop of more than 15 percent the next trading day.

 

The main cause for concern in the report was that Chewy had missed its projected 19 percent sales increase. Price increases as a result of ongoing supply chain and shipping issues also ate into the company’s profitability, causing its gross margin to slide to 25.4 percent.

There were, however, also some bright spots in the Q4 reporting. Revenues increased by 17 percent year-over-year. Sales from autoshipping rose by 21 percent, showing decent growth in the company’s recurring subscription business. Chewy’s pet pharmacy business also showed exceptional growth, rising 75 percent in the final quarter of 2021.

 

Overall, analyst price forecasts suggest that Chewy will perform quite well over the next 12 months. The stock currently trades at $40.93, and the median price target is $59. This would represent a gain of 44.1 percent for the rebounding stock.

 

It’s also worth noting that the lowest price target places the stock at $41. In other words, the worst-case scenario among analyst forecasts shows the stock remaining flat but not taking any actual losses.

 

Although the price targets present a low-risk picture in terms of share price, there are still some issues with Chewy that investors should be aware of. First and foremost is the company’s ongoing lack of profitability. After more than 10 years in business, Chewy still hasn’t reached the point of generating profits, leading some to question how far out that point could be.

 

The end of the pandemic could also have broader implications for Chewy from a competitive standpoint. Companies such as Petco that maintain brick-and-mortar stores offer the same lineup of pet-related products as Chewy but can also capitalize on in-person services. Grooming and veterinary services, for instance, represent sources of revenue for brick-and-mortar retailers that Chewy has limited access to. 

 

A final concern for investors comes in the form of Chewy’s valuation metrics. While it’s not unusual for startups like Chewy to be priced high, some of the metrics for this company stand out as especially worrisome. Price-to-book, in particular, should give investors pause at a ratio of 1,160. Price-to-sales is also quite high for the industry at 1.92. Although these metrics don’t necessarily rule Chewy out as a buy, they’re important to consider before opening a position on the company.

 

While Chewy has certainly seen its share of headwinds recently, there’s cause for optimism going forward. Slipping sales and customer growth give every indication of being related to pandemic volatility rather than signaling waning market interest in Chewy. Once this one-time drop passes, the company will likely begin to rebound.

 

 

Although rising costs and supply issues are troubling, management seems to be getting out in front of these problems. Cost-cutting efforts in conjunction with price increases should help Chewy to get its margins back on track. Though it may take some time for these changes to show in company reporting, there’s little reason to believe that margin will fall any more than it already has.

 

Price targets for Chewy also appear quite promising. With a median predicted upside of over 40 percent, Chewy could miss the target substantially and still beat the broader market. The low price target indicating flat performance suggests that there isn’t too much risk associated with shares of Chewy over the coming 12 months.

 

With all of this said, Chewy does have some downsides. It can’t compete effectively with brick-and-mortar retailers when it comes to pet care services, particularly vet care. It does, however, make up for this with its online pet pharmacy business line. Valuation metrics present a somewhat more fundamental problem, but future growth may alleviate these difficulties.

 

Overall, Chewy stock is a good bet on the rapidly growing marketplace for pet care products. The stock’s potential upside at its current price is enough to offset some of the risks that may come along with it. Investors who want to buy Chewy stock, however, should likely take advantage of the prevailing lower prices while they can. The stock is a decent buy at its current price. As prices rise and potential upside shrinks, it may be harder to justify buying a stock with Chewy’s valuation dilemma.

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