Chewy: Buy, Sell, or Hold?
Chewy (NYSE: CHWY) has recently captured the attention of the investment world, particularly since Keith Gill, known by his Youtube alias Roaring Kitty, disclosed a significant 6.6% shareholding through a Securities and Exchange Commission (SEC) filing. Gill, celebrated for his influential role in the GameStop saga, has brought Chewy back into the spotlight. Since its IPO in 2019, Chewy’s stock journey has been nothing short of a rollercoaster, with shares witnessing a sharp decline after a pandemic-driven surge, fueled by an increase in pet adoptions. As of the start of 2020, Chewy’s shares have experienced an 8% drop, starkly contrasting with the S&P 500’s 74% gain.
However, investment decisions should be grounded in a robust long-term view, not short-term volatility. In this context, does Chewy present a solid investment opportunity?
Founded in 2011, Chewy has carved a niche in the online sale of pet products, supplies, and prescriptions. This market segment is typically resilient, given pet owners’ propensity to spend on their pets regardless of economic fluctuations.
Pet spending, as per data from the U.S. Bureau of Labor Statistics, escalated 78% from 2013 to 2021, notably outpacing entertainment expenses during the same period. Moreover, the American Pet Products Association highlighted that pet spending witnessed a 12% increase during the tough economic phase from 2008 to 2010, even as many other spending categories took a hit.
Chewy’s competitive strengths lie in its substantial online footprint and exceptional customer service. Although there was a slight decrease in active customers—from 20.7 million in fiscal 2021 to approximately 20.1 million in 2023—the rise in sales per active customer from $434 to $562 in the first quarter of 2023 signals a robust customer spend.
The company’s autoship subscription program continues to be a major revenue driver, accounting for 77.6% of total sales, with a 6.4% growth rate that significantly outperforms the company’s overall growth. This program’s success is attributed to higher customer retention and spending.
Chewy’s first-quarter profits nearly tripled to $66.9 million under generally accepted accounting principles (GAAP), showcasing the company’s growing profitability. With plans to expand into veterinary centers, management is optimistic about capturing a significant market opportunity.
Despite the recent underperformance in share value, Chewy’s current price-to-sales (P/S) ratio of 1 indicates an appealing valuation, especially when contrasted with its early 2021 P/S multiple of over 6 and roughly 2 at the beginning of 2023. This, coupled with the S&P 500’s P/S ratio of 3, positions Chewy as an attractive investment prospect.
While Keith Gill’s involvement may introduce volatility to Chewy’s stock, the underlying strength of its core pet business and autoship program positions the company as an opportunity for long-term, value-oriented investors.
In the ever-evolving stock market, finding the right time to invest can be daunting. Yet, the consensus among our expert team of analysts is that now is an opportune moment to consider Chewy. With a keen eye on companies poised for growth, our “Double Down” stock recommendations signify potential that may not come around again soon. With Chewy’s current trajectory, the time to act might just be now.
