{"id":427519,"date":"2022-04-18T12:26:50","date_gmt":"2022-04-18T16:26:50","guid":{"rendered":"https:\/\/financhill.com\/blog\/?p=427519"},"modified":"2022-04-18T13:36:48","modified_gmt":"2022-04-18T17:36:48","slug":"is-chewy-stock-overvalued","status":"publish","type":"post","link":"https:\/\/financhill.com\/blog\/investing\/is-chewy-stock-overvalued","title":{"rendered":"Is Chewy Stock Overvalued?"},"content":{"rendered":"<p><span style=\"background-color: transparent;\">Americans are mad about their finned, scaled, feathered, and furry kids.<strong><a href=\"https:\/\/rainwalkpetinsurance.com\/pet-ownership-statistics\/\" target=\"_blank\" rel=\"noopener\"> Approximately 90.5 million families<\/a> &#8211; 70 percent of households &#8211; currently share their home with some sort of critter. <\/strong><\/span><\/p>\n<p><span style=\"background-color: transparent;\">That\u2019s 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.&nbsp;<\/span><\/p>\n<p><span style=\"background-color: transparent;\">However, cats and dogs aren\u2019t the only adored pets. <strong>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.<\/strong> <\/span><\/p>\n<p><span style=\"background-color: transparent;\">Collectively, these creatures need all sorts of supplies, from food and medicine to specialized housing. That doesn\u2019t even touch on the non-essentials, which are sought-after among pet owners. Toys, treats, and pet attire are surprisingly&nbsp;hot commodities.&nbsp;<\/span><\/p>\n<p><iframe loading=\"lazy\" style=\"margin: 0 auto; border: 0;\" src=\"https:\/\/financhill.com\/widget\/charts\/CHWY\" width=\"720\" height=\"400\" frameborder=\"0\" scrolling=\"no\" seamless=\"\"><\/iframe><\/p>\n<p><span style=\"background-color: transparent;\"><strong>In 2010, <a href=\"https:\/\/www.denverpost.com\/2012\/03\/02\/americans-spent-nearly-51-billion-on-their-pets-in-2011\/\" target=\"_blank\" rel=\"noopener\">Americans spent $48.35 billion on their pets<\/a>. In 2019, that figure was up to $75.38 billion.<\/strong> Granted, some of that goes to veterinary expenses, but a large percentage shows up as revenue for pet retailers.&nbsp;<\/span><\/p>\n<p><span style=\"background-color: transparent;\"><strong>Petco, PetSmart, and Pet Supplies Plus might have the brick-and-mortar market cornered, but today\u2019s consumers are all about e-commerce. In that area, Chewy is the winner.<\/strong> <\/span><\/p>\n<p><span style=\"background-color: transparent;\">Since the novel coronavirus made in-person shopping taboo, Chewy\u2019s sales &#8211; and share prices &#8211; have soared.&nbsp;<\/span><\/p>\n<p><span style=\"background-color: transparent;\">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?&nbsp;<\/span><\/p>\n<h2><strong style=\"background-color: transparent;\">Why Chewy Stock Went Up?<\/strong><\/h2>\n<p><span style=\"background-color: transparent;\"><a href=\"https:\/\/investor.chewy.com\/financials\/quarterly-results\/default.aspx\" target=\"_blank\" rel=\"noopener\">Chewy<\/a> started 2020 around $30 per share, and it hit a high of $70 per share in early September. <\/span><\/p>\n<p><span style=\"background-color: transparent;\">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.<\/span><\/p>\n<p><span style=\"background-color: transparent;\">However, Chewy was already increasing its revenue well before the pandemic took over the world economy. <strong>For the fiscal year that ended February 2, 2020, management reported sales of $4.85 billion.<\/strong> That\u2019s impressive from a company that started at zero in 2011.&nbsp;<\/span><\/p>\n<h2><strong style=\"background-color: transparent;\">Chewy Financials<\/strong><\/h2>\n<p><span style=\"background-color: transparent;\">COVID-19 might have pushed consumers to embrace e-commerce more quickly, but the trend towards online shopping was already well-established. <\/span><\/p>\n<p><span style=\"background-color: transparent;\">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.&nbsp;<\/span><\/p>\n<p><span style=\"background-color: transparent;\"><strong>Consider this: in 2019, <a href=\"https:\/\/www.oberlo.com\/statistics\/us-ecommerce-sales\" target=\"_blank\" rel=\"noopener\">US e-commerce sales hit $595.5 billion<\/a>. That represents an increase of 14.9 percent year-over-year.<\/strong> <\/span><\/p>\n<p><span style=\"background-color: transparent;\">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.&nbsp;<\/span><\/p>\n<p><iframe loading=\"lazy\" style=\"margin: 0 auto; border: 0;\" src=\"https:\/\/financhill.com\/widget\/fundamentals\/CHWY\" width=\"720\" height=\"400\" frameborder=\"0\" scrolling=\"no\" seamless=\"\"><\/iframe><\/p>\n<p><span style=\"background-color: transparent;\">Chewy\u2019s financials mirror the rise of e-commerce, which is reflected in stock prices. In the last fiscal year,<strong> 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.&nbsp;<\/strong><\/span><\/p>\n<p><span style=\"background-color: transparent;\">From a consumer perspective, it is clear that&nbsp;there is an appetite for transitioning from brick-and-mortar pet stores to the convenience of e-commerce. <\/span><\/p>\n<p><span style=\"background-color: transparent;\">Chewy increased its customer base 27 percent total for the last fiscal year, but the pace of new accounts quickened in 2020.<strong> During the first fiscal quarter, <a href=\"https:\/\/seekingalpha.com\/article\/4373629-chewy-inc-chwy-ceo-sumit-singh-on-q2-2020-results-earnings-call-transcript\" target=\"_blank\" rel=\"noopener\">Chewy increased customers by 33 percent<\/a> year-over-year, and that went up to 38 percent for the second fiscal quarter.&nbsp;<\/strong><\/span><\/p>\n<p><span style=\"background-color: transparent;\">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\u2019s far better than the expected loss of ($0.15)\/share. It\u2019s worth noting that revenues came in at $1.70 billion for the quarter, which exceeded the expected $1.64 billion.<\/span><\/p>\n<h2><strong style=\"background-color: transparent;\">Is Chewy Valuation Too High?<\/strong><\/h2>\n<p><span style=\"background-color: transparent;\">Chewy\u2019s stock prices hit their high just before the earnings announcement, then leveled to something more sustainable. It\u2019s safe to say that at $70 per share, Chewy\u2019s valuation was too high. <\/span><\/p>\n<p><span style=\"background-color: transparent;\">While the company certainly&nbsp;shows a lot of potential, buying at that price at that time&nbsp;would have been less than ideal.&nbsp;<\/span><\/p>\n<p><iframe loading=\"lazy\" style=\"margin: 0 auto; border: 0;\" src=\"https:\/\/financhill.com\/widget\/stock-score\/CHWY\" width=\"720\" height=\"500\" frameborder=\"0\" scrolling=\"no\" seamless=\"\"><\/iframe><\/p>\n<p><span style=\"background-color: transparent;\">At today\u2019s more realistic prices, most analysts agree that Chewy\u2019s valuation is just where it needs to be. <\/span><span style=\"background-color: transparent;\">In general, e-commerce is growing, as is the pet industry, and Chewy is well-positioned to benefit from both. <\/span><\/p>\n<p><strong><span style=\"background-color: transparent;\">According to the American Pet Products Association, 2019\u2019s 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 <a href=\"https:\/\/www.iii.org\/fact-statistic\/facts-statistics-pet-statistics\" target=\"_blank\" rel=\"noopener\">$122.7 billion that year.&nbsp;<\/a><\/span><\/strong><\/p>\n<p><span style=\"background-color: transparent;\">In 2014, roughly 7 percent of those sales were made through online channels. That figure grew to 22 percent in 2019. <\/span><\/p>\n<p><span style=\"background-color: transparent;\"><strong>Company management estimates that by 2024, 35 percent of pet-related sales will take place through e-commerce<\/strong>. Given that Chewy controls a large portion of online market share &#8211; perhaps 40 percent &#8211; all signs look good for long-term success.<\/span><\/p>\n<h2><strong style=\"background-color: transparent;\">Is Chewy Stock Overvalued? The Bottom Line<\/strong><\/h2>\n<p><span style=\"background-color: transparent;\">Chewy stock may have some ups and downs in coming months, but that\u2019s normal for any company. The sort of&nbsp;drop that makes investors lose sleep already happened in early September. <\/span><\/p>\n<p><span style=\"background-color: transparent;\">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. <\/span><\/p>\n<p><span style=\"background-color: transparent;\">Of course, any investment carries risk, and shares may always lose value, but Chewy appears less risky than less-established online retailers. <\/span><span style=\"background-color: transparent;\">In other words, at current prices, Chewy stock is a buy for longer term investors.<\/span><\/p>\n<p>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 <strong>CHWY fair market value at $45 per share<\/strong>. Share prices above that level would suggest that the company is overvalued.<\/p>\n<p>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.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Americans are mad about their finned, scaled, feathered, and furry kids. Approximately 90.5 million families &#8211; 70 percent of households &#8211; currently share their home with some sort of critter. That\u2019s 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 [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":427522,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"content-type":"","jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","enabled":false},"version":2}},"categories":[22],"tags":[],"class_list":["post-427519","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"https:\/\/financhill.com\/blog\/wp-content\/uploads\/2020\/10\/is-chewy-stock-overvalued.jpg","jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/p9czeV-1Ndt","_links":{"self":[{"href":"https:\/\/financhill.com\/blog\/wp-json\/wp\/v2\/posts\/427519","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/financhill.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/financhill.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/financhill.com\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/financhill.com\/blog\/wp-json\/wp\/v2\/comments?post=427519"}],"version-history":[{"count":8,"href":"https:\/\/financhill.com\/blog\/wp-json\/wp\/v2\/posts\/427519\/revisions"}],"predecessor-version":[{"id":518782,"href":"https:\/\/financhill.com\/blog\/wp-json\/wp\/v2\/posts\/427519\/revisions\/518782"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/financhill.com\/blog\/wp-json\/wp\/v2\/media\/427522"}],"wp:attachment":[{"href":"https:\/\/financhill.com\/blog\/wp-json\/wp\/v2\/media?parent=427519"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/financhill.com\/blog\/wp-json\/wp\/v2\/categories?post=427519"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/financhill.com\/blog\/wp-json\/wp\/v2\/tags?post=427519"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}