Stock Analysis & Ideas

Chewy Stock: Plenty of Meat on the Bone for Investors

Story Highlights

Chewy serves a niche product category, and the skeptics will doubt that Chewy stock can recover from its slump. Nonetheless, some fresh financial data might convince Wall Street to finally let Chewy stock out of the doghouse.

Headquartered in Florida, Chewy (CHWY) is an online retailer of pet products. I am bullish on the stock.

If you’ve been investing for a while, you might remember the rise and fall of Pets.com in the early 2000s. Back then, the prospect of people buying pet products through the internet was new and exciting. Speculators bid up the Pets.com share price, but this story didn’t have a happy ending.

In hindsight, it’s evident that the public wasn’t ready to buy pet goods online at that time. Pets.com stock crashed and then disappeared, providing a painful lesson for hasty traders. Fast-forward a couple of decades, and e-commerce is a normalized part of the culture – and Chewy hopes to succeed in a category where Pets.com failed.

Although Chewy was launched relatively recently, in 2011, today the company offers a selection of more than 100,000 products as well as one-to-two-day shipping. The company also offers a “convenient Autoship subscription program” which allows the customers to schedule their orders in advance so they won’t run out of necessary pet supplies, like food.

It’s an interesting business model, but this still leaves a crucial question open: Is Chewy a viable enterprise in a challenging niche market? Just-released data suggests that Chewy, while not for everyone, could be a worthy pet project for risk-tolerant investors.

On TipRanks, CHWY scores an 8 out of 10 on the Smart Score spectrum. This indicates a potential for the stock to outperform the broader market.

Firmly on the Shopping List

It’s been a tough road for Chewy’s stalwart shareholders as the stock price topped out near $119 in February of last year, only to slide into the $20 range not long ago. Suffice it to say, then, that any positive news would be welcome as some Chewy stockholders are undoubtedly waiting to break even.

At least, it can be said that the investing community evidently anticipated that Chewy would lose money during 2022’s first quarter. That’s not necessarily a bad thing, as low expectations can sometimes lead to nice surprises thereafter.

To be more specific, analysts were prepared for Chewy to report $2.41 billion in revenue and an earnings loss of 10 cents per share for the quarter. Raymond James analyst Aaron Kessler’s revenue estimate was $2.42 billion, while Kessler predicted that Chewy would add a net 190,000 subscribers during the first quarter.

With all of that in mind, Kessler issued a Market Perform rating on Chewy stock. One noteworthy point for the bulls is that, in a Raymond James survey, 38% of the respondents affirmed that they used Chewy, while pet superstores only received 30% of the vote.

Deutsche Bank analyst Lee Horowitz, meanwhile, issued a $35 price target on Chewy stock prior to the company’s most recent quarterly data release. This is fairly optimistic, given the stock’s current price. In defense of this price objective, Horowitz posited that Chewy “should be firmly on growth investors’ shopping lists” as soon as “investors can more definitively pin down the length and depth of the likely U.S. recession.”

Resiliency of the Category

Does this mean that investors need to wait for a recession to occur before taking a position in Chewy stock? Not at all, as Chewy’s first-quarter 2022 fiscal report should give prospective shareholders some data to chew on.

Within minutes after the report’s release, Chewy stock jumped 25%. So, what could have spurred this optimism? As mentioned earlier, analysts expected Chewy to report $2.41 billion in revenue, and the actual result was $2.43 billion. That’s not a massive beat, but it’s still an improvement of 13.7% year-over-year.

The fiscal picture is looking pretty good, so far. Here’s where the rubber really meets the road, though. Evidently, there was a huge surprise in store for the experts who had anticipated that Chewy would post a 10-cents-per-share earnings loss. As it turned out, Chewy didn’t post a quarterly net loss at all. Rather, the company reported $18.5 million in net income, which translates to earnings of 4 cents per share.

In light of these results, Chewy CEO Sumit Singh had every right to engage in some reflection on an unexpectedly positive quarter, and on the pet product market in general. “Our first quarter results are a testament to the resiliency of the pet category and clearly demonstrate our ability to execute against our strategic priorities,” Singh assured.

This doesn’t mean that Chewy doesn’t have room to improve, though. In particular, the company’s Q1 2022 adjusted EBITDA of $60.5 million implies a decline of 21.8% year-over-year. Therefore, investors might choose to monitor this financial metric in Chewy’s future earnings reports.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, CHWY is a Moderate Buy, based on 10 Buy and seven Hold ratings, and one Sell rating. The average Chewy price target is $49.94, implying 71.09% upside potential.

The Takeaway

Chewy stock has been in the doghouse for a while – there’s no denying it. It’s possible that investors’ expectations had gotten so low that Chewy was poised for a positive surprise.

Could Chewy stock finally have turned a corner with the company’s unexpected quarterly net profit? It’s certainly possible, and it looks like there’s powerful potential for upside in Chewy stock. It’s a speculative investment – let’s not forget the lessons of Pets.com – but at least there’s hope now that Chewy stock hasn’t gone to the dogs.

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