Down 56.9% so far this year, online pet pharmacy PetMed Express (NASDAQ:PETS) has really caused its shareholders a lot of heartache.
Such drastic selloffs often create opportunities for value investors to buy stocks on sale, so is that the case with PETS share price or is the worst yet to come?
Sales Sliding Downhill But Horizon Is Bright
In its Q2 earnings report, management reported year-over-year revenue growth of 9% and total customer growth of 25%.
Although growth is good, how it compares to expectations from the Street is what matters most and, sadly, the reported quarterly revenue of $71 million missed analysts expectations by $5 million, triggering a sharp selloff.
The grim news continued on the bottom line when the company reported a small loss of around $70,000 versus the plus $2.6 million or $0.13 per share in the year prior quarter.
Notably, analysts had expected earnings to slip, though the consensus earnings estimate for Q2 was $0.09 per share so reporting an EPS figure in the red came as a big surprise.
A big drag on the income statement in the most recent quarter stemmed from higher than expected operating expenses over the trailing twelve month period.
Even as revenues grew slowly and earnings tailed off, total operating expenses rose from $15.7 million to $20.2 million, a sharp and sudden jump in the cost of operations that detrimentally impacted the quarterly results.
It’s also worth noting that PetMed’s Q2 difficulties appear to be part of a longer trend. Revenue, for instance, peaked in FY 2021 at $309.2 million and has been falling off gradually ever since to just $256.9 million in FY 2023.
So too has earnings per share taken a big hit, coming in at $1.84 per share in FY 2018 and sliding every year since to just $0.01 in this fiscal year. It seems, as a result, that a progressive decline remains in motion.
On a brighter note, analysts do PetMed Express to be marginally profitable in 2024. In light of the quarterly earnings disappointment, however, investors will likely need to see a quarter or two of positive earnings to restore their confidence in the stock.
If PetMed fails to deliver this or slips further into the red, it’s entirely possible that shares will continue to fall going into the coming year.
PetMed Express Stock Forecast
The PetMed Express stock forecast over the next 12 months is for the share price to rise by 26.5% to fair value of $9.75 per share according to two analysts.
It’s worth emphasizing that the coverage of the stock among Wall Street analysts is somewhat limited and the range is wide from $7 per share to $13 per share.
To help zoom in on a more accurate intrinsic value, we can turn our attention to a discounted cash flow forecast analysis, which puts a $10.14 per share price target on PETS.
Even a price-to-sales ratio of 0.6x would suggest that PetMed Express is undervalued and could start a bullish trend anytime soon. However, the persistent decline in revenues over the past few fiscal years is undoubtedly concerning and continuing to pressure earnings, which in turn is skyrocketing the P/E ratio and calling the value argument into question.
One bright spot for PetMed Express stems from its balance sheet where the company operates without any debt burden whatsoever.
Will Chewy Take a Bite Out Of Business?
Among the headwinds facing PetMed Express is the competitive threat from other online pet medication providers, such as the large pet toy and supply company Chewy (NYSE:CHWY), which launched its own medical branch in 2018 and is now the largest online pet pharmacy. Without a meaningful moat, PETS faces the threat of an erosion to its competitive advantages that had translated to attractive financials just a few years ago.
Another pressing concern facing shareholders is the decision by the Board of Directors to suspend quarterly dividends following the disappointing Q2 earnings report. At the time, management stated that the decision was made in order to reinvest in growth initiatives, but it likely stemmed also from concerns about the sharp reduction in cash in recent quarters.
To further that point, PetMed Express has drastically reduced its holdings of cash and cash equivalents this year from $104.1 million in Q1 to just $53.5 million by Q3.
Although PetMed’s ability to fund its operations looks secure in the short term, the company will not be able to continue drawing down its cash stockpile at this pace without resorting to either borrowing or perhaps, worse, a secondary stock offering.
Is PetMed Express Stock a Buy?
PetMed Express is clearly attractive from a valuation perspective, with both analysts and a DCF analysis placing fair value much higher. So too, a P/S ratio would infer that the stock is a buy.
It seems management is on the same page with the company’s CEO and CFO both making significant purchases of PETS shares following the Q2 report.
In addition, institutional investors continue to show conviction by owning about 75% of outstanding shares. That is not the type of proportion that would signify the big money is fleeing the stock, yet.
Likely that confidence stems from the company’s position in a fast-growing market and the expectation that pet care spending will more than double over the next 10 years. There is a question hanging over the company regarding its ability to capture further market share. It’s possible that it will simply need to sustain its share to report good numbers over the next decade as market expansion alone rewards shareholders.
For now, PetMed Express appears too have too many concerns for conservative investors to feel comfortable buying, though bargain hunters could take a swing at bat in the hopes of hitting a home run.
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.