Why Is WOOF Stock Going Up?

Shares of Petco (NASDAQ:WOOF) have risen by over 70% in the last 30 days, a much-needed rebound for a stock that has been gradually losing ground over several years.

This sudden spike in prices came as a surprise to many investors because the company’s most recent earnings report didn’t seem to warrant such a drastic turnaround.

Why is WOOF soaring all of a sudden, and can the stock maintain its current momentum?

Why Is WOOF Stock Going Up?

The recent spike in WOOF stock price followed Petco’s most recent earnings report that appeared to signal the worst of the company’s losses are in the rearview mirror.

Though far from stellar, the Q2 earnings report appeared to show that Petco’s problems were beginning to bottom out.

Revenue, for example, totaled $1.52 billion for the quarter and was down 0.5% from the year-ago quarter.

Though a drop in revenues would typically send shares markedly lower, the Q2 result was a considerable improvement over the 1.7% drop seen in Q1.

Even with revenues falling, comparable store sales rose 0.3%, suggesting that Petco’s existing locations still have the capacity to generate growth for the company. In Q1, comparable sales were down 1.2%.

A similar trend to that of revenues played out in Petco’s Q2 net loss. Though the company lost $24.8 million in the quarter, the loss was much smaller than the $46.5 million it reported in Q1. In the last 12 months, Petco has lost about $1.34 billion, though the overwhelming majority of this was attributable to a net loss of $1.24 billion in Q3 of last year.

In addition to somewhat better Q2 results, Petco still appears to have a decent opportunity to capitalize on the growth of spending on pets in the US.

Petco is one of two large brick-and-mortar pet and pet supply stores in the United States, the other being PetSmart.

Between 2013 and 2021, pet spending in America rose by about 67%. Though the trend has plateaued since then, Americans are still spending far more on their pets than they were a decade ago.

What’s Really Sending WOOF Shares Higher?

The improvements in Q2 compared to Q1 suggest that Petco is beginning to find its footing again.

The company has been making efforts to improve its profitability for some time, and those efforts appear to be slowly paying off. Even with these better results, however, shares fell slightly after the Q2 report was released.

The real cause for most WOOF’s price surge appears to be the influence of meme stock trader Keith Gill, better known by his online handle “Roaring Kitty.”

The day after Petco released its Q2 report, Gill shared a social media post appearing to hype the stock on Reddit.

The same day, shares spiked by 35%. Gill’s social media posts are widely watched by young retail investors and played a large role in the 2020 meme stock craze.

It’s worth noting that this isn’t the first time WOOF has run up on one of Gill’s online posts. In June, a picture of a dog posted to one of Gill’s accounts caused shares of Petco and eCommerce rival Chewy to spike temporarily.

WOOF Has Ticked Up, But the Stock is Still Massively Sold Off

Although the last month has seen considerable improvements for Petco shares, it’s important to recognize that the stock is still trading far below its historical highs.

In early 2021, the stock closed at its record high of $29.40. Today, shares sell for only about one-sixth of that amount.

Unsurprisingly, Petco currently trades at very low value multiples. At just 0.2x sales and 1.0x cash flow, Petco appears extremely cheap.

Considering the steep losses that the company has incurred, though, investors must be careful of a possible value trap in WOOF shares.

Will WOOF Continue Rising?

While stabilizing performance could be a catalyst for Petco shares continuing to move higher, current analyst forecasts don’t suggest significant upside in the stock. In fact, the median analyst price forecast for WOOF is $3.25, more than 30% below the most recent price of $4.78.

While recently updated forecasts are somewhat more bullish, there doesn’t appear to be a great deal of room for Petco to continue gaining without meaningful further improvements in its performance.

Investors buying Petco today must also contend with the possible volatility caused by an influx of meme stock traders. Though Keith Gill’s apparent support for the stock on Reddit has sent the stock temporarily soaring, history suggests the effect could be short-lived.

Gill’s famous stake in video game retailer GameStop, for example, notably cost him nearly $13 million in one day when the vastly overvalued stock collapsed in early 2021.

Stocks inflated by social media have a habit of rising quickly and then falling back to earth as short-term traders take profits.

Petco’s finances also appear somewhat concerning, as the company’s debt-to-equity ratio is 1.4 while its current ratio is 0.8.

As of the end of Q2, Petco held about $47 million in cash and cash equivalents. Total assets were $5.28 billion, while total liabilities were $4.15 billion. These numbers aren’t terrible, but they don’t appear to offer Petco much room for error if future quarters produce steeper-than-expected losses.

Closely related to its financial status is the fact that Petco has been gradually raising its share count in recent quarters. On a year-over-year basis, the total number of outstanding shares has risen by 2.3%. If Petco has to raise additional capital, this trend may very well accelerate and dilute shareholders’ ownership stakes.

At the end of the day, Petco appears to be too early in what may be a comeback story to make it a particularly attractive investment.

Between stock prices driven rapidly higher by social media traders and a lack of concrete growth, Petco seems to have too many unknowns and a high risk of near-term volatility.

Though the company may have potential as an investment, it may be better to wait for sustained revenue growth and improved earnings.

With the stock sold off as far as it is, it might well have a long runway for future gains if and when the company’s fundamentals begin moving back in the right direction for the long run.

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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.