Shares of online pet product provider Chewy (NYSE:CHWY) are up 28.4% in the last month, a performance that has rewarded longtime shareholders and surprised many who expressed bearish views on the stock.
Just why have Chewy shares suddenly shot up to outperform the market, and can the stock continue this run to reach even higher prices?
Why Is Chewy Stock Going Up?
CHWY shares have been rising on the basis of a better-than-expected Q1 earnings report released on May 29th.
In the quarter, revenues advanced 3.1% year-over-year to a record high of $2.88 billion. Though a modest increase, this allowed Chewy to retain its streak of consistent year-over-year revenue growth in every quarter since its 2019 IPO.
In addition to continuing its revenue growth streak, Chewy was also able to make significant headway in terms of profitability. Net income was $66.9 million, up from $34 million in Q4 and just $23 million in the year-ago quarter.
Net margin was still fairly low at just 2.3%. However, this represented an improvement of 150 basis points when compared to the year-ago quarter. As such, it’s fair to say that Chewy has substantially improved its profitability while continuing to raise revenues, even if its margins remain modest.
Though Chewy’s results may not be considered spectacular, particularly in the area of revenue growth, they significantly outperformed the forecasts analysts had put forward prior to the earnings release.
Chewy’s business exploded during the COVID-19 pandemic as home-bound pet owners spent more heavily on toys, treats and other products for their animal companions. Understandably, the growth of that period didn’t last, leaving a more pessimistic view of the company among observers.
Chewy’s ability to generate growth ever since is impressive, and the recent beat gave the stock a much-needed boost.
Shares were also bolstered by the fact that Q1’s earnings report was accompanied by the announcement of a $500 million share repurchase program. Given Chewy’s market capitalization of $11.85 billion, this buyback authorization represents over 4% of the company’s total value.
Later, it was decided that the entirety of the $500 million would be used to repurchase Class A shares from BC Partners, the company’s largest shareholder. The buyback will reduce the total combined number of Class A and Class B shares from about 436 million to about 418 million.
Chewy’s Growth Runway
Though Chewy has certainly improved its performance over the last year, the real question for investors is how much more room for growth the company has in front of it. Fortunately, Chewy looks fairly strong in this category.
Although the company’s revenue growth has been somewhat slow, it stands in sharp contrast to competitors that have seen their sales drop. Continued growth, particularly in recurring purchases like food and pet medications, are likely to drive a steady continued expansion in earnings.
The market in which Chewy operates is also becoming both larger and more lucrative. Pet ownership among US households has risen 10% since the 1980s and now stands at about 66%.
The rate of spending per pet has risen much faster, climbing from $460 annually per pet in 2013 to about $740 in 2022.
With younger pet owners in particular continuing to prioritize spending on their furry friends, Chewy is in a prime position to capture a large share of a market that shows few signs of slowing down anytime soon.
How Is Chewy’s Valuation Looking?
By most standards, Chewy looks attractively valued for a company that still has some decent room for growth.
The stock’s price-to-sales ratio, for instance, is a very reasonable 1.1. At 28.3, the forward P/E ratio is above the market average but still within a decent range for a company with fast-growing earnings.
Speaking of which, Chewy’s price-to-earnings-growth ratio of 1.0 is yet another piece of evidence that the stock is valued quite fairly.
The two areas that raise some red flags are the price-to-cash-flow ratio and price-to-book of 74.7 and 18.4, respectively. These metrics are certainly high, but the room Chewy has left for earnings growth likely makes them less worrying than they might otherwise be.
Ultimately, Chewy’s valuation looks good enough for value investors to take an interest in the stock. Though perhaps not truly undervalued, it seems that CHWY shares are trading at a very fair price as long as the company can maintain its growth streak.
It’s also worth recognizing that despite the strong recent performance, Chewy shares are still down more than 30% from a year ago. As such, the stock has sold off enough that there may well be room for investors to capture returns as the company recovers.
How Risky Is Chewy?
Even with the better performance in Q1, the company’s trailing 12-month net margin is still a very minimal 0.7%.
Management may have to deliver at least a few more quarters of improving results to convince shareholders that the company has become reliably profitable with such slim margins.
Competition from both eCommerce and brick-and-mortar pet retailers will also remain strong as pet care spending continues to increase.
These concerns, however, are offset by two major factors. The first is Chewy’s balance sheet, which includes no long-term debt and a reserve of cash and cash equivalents totaling $1.13 billion.
This gives Chewy ample capital to pursue stock repurchases, invest in new marketing and growth initiatives or even pursue strategic acquisitions if and when they become attractive.
The second factor that offsets Chewy’s risks is the fact that the company has a strong moat in the pet care industry. According to Chewy’s self-reported statistics, the company has over 20 million active customers.
About 51% of American pet owners who shop for pet supplies online use Chewy. Though it will certainly face competitive pressures, Chewy is the dominant force in the online pet supply business and will likely be difficult to unseat.
Is Chewy a Buy Now?
Overall, Chewy looks like it could be a decent buy at the moment. Though the recent run has already priced in the good news of the last earnings report, the stock still appears to trade at a fair price and the company could still have a long growth story ahead of it.
Given its solid financial standing, prime position in a growing industry and ability to produce growth even in challenging conditions, Chewy may very well be a stock to look at for investors willing to buy and hold for the long run.
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