1 Growth Stock Down 80% to Buy Right Now


This online pet supply retailer is suddenly giving investors much to think about.

With its stock up 30% since the company reported its fiscal first-quarter results late last week, the idea of stepping into a new stake in Chewy (CHWY 5.53%) right now could be a little intimidating. That’s a big gain in a short period of time, inviting profit taking from the stock’s now-loftier levels.

If Chewy was on your watch list of potential purchases prior to this jump, however, know that it’s not too late to dive in. Indeed, if anything the surge could shake the stock out of a rut that’s kept it from making any real forward progress since September of last year.

You may actually be best served by stepping in here despite the stock’s recent rally, in fact, given the odds that more upside is in store.

Chewy’s different in one important way

Chewy is a retailer of pet food, supplies, toys, and other pet-related goods. Unlike rivals Petco Health and Wellness, PetSense, and PetSmart though, Chewy doesn’t have a brick-and-mortar retailing presence. It’s been built from the ground up since its founding in 2011 to be an online-only outfit. And this has proven to be no minor detail.

Many of its competitors experienced most of their growth between the late 1980s and early 2000s, when America saw an explosion in the construction of retail stores, and before the internet became common. But the advent of e-commerce has leveled the playing field, providing newcomers like Chewy a fighting chance to penetrate the market while leaving outfits like PetSmart and PetSense saddled with too much expensive real estate.

Image source: Getty Images.

Granted, the data doesn’t convincingly support this claim with just a passing glance. Only $296 million of Chewy’s revenue of $11.1 billion last year was turned into net income. That’s a net profit margin in the range of 2.7% — less wiggle room than most investors care to accept. The stock’s current price of 32 times last year’s per-share earnings of $0.69 isn’t exactly cheap either.

What these numbers don’t show, however, is the fiscal trajectory Chewy is on, and is apt to remain on into the foreseeable future. The bullish argument is far stronger in light of this growth.

The tailwind is still blowing

If money is truly tight these days, somebody forgot to tell pet owners. The American Pet Products Association reports U.S. consumers spent $147 billion on their pets in 2023, up more than 7% from the prior year’s figure. The organization says this year’s spending growth will cool to a more modest 2.4% increase, reaching sales of $150.6 billion.

Even so, data from a recent survey performed by retirement plan management firm Empower indicates that 1 out of every 3 Americans buy more products for their pets than they buy for themselves.

Like all other consumers though, pet owners are also (eventually) fiscally practical, finding value when and where they can. That’s a big reason this year’s projected pet spending growth is slower than last year’s actual growth. All of these folks are still feeding their critters; a bunch of them are simply switching to non-premium food, or finding cheaper ways to continue purchasing their high-end pet food.

Buying it online is, of course, an increasingly utilized means of doing so. That’s why market research company ECDB suggests the online pet shopping market is set to expand at an average annualized pace of 12.6% through 2028, jibing with outlooks from Bloomberg Intelligence and consumer goods market research outfit Packaged Facts.

Given Chewy’s leading share of the U.S. sliver of this market — and the fact that it’s outgrowing all of its direct online competitors — the company is well-positioned to capture more than its fair share of this growth.

Finally, some overdue faith in Chewy stock

So why is the stock still down more than 80% from its early 2021 high? Much of this weakness is the result of timing and unusual circumstances.

You may recall that the company only went public back in mid-2019, just a few months before the COVID-19 pandemic took hold. Both ended up being bullish for the stock. Indeed, this name was especially ripe for a big rally back in 2020 simply because pets became one of the key ways consumers spent their time (and money) when stuck at home during pandemic lockdowns.

The euphoria wouldn’t last, of course. People eventually lost interest. Most investors also eventually came to their senses, recognizing shares of this then-unprofitable company were priced too richly no matter how you valued them. It’s remained off most investors’ radars since then.

Last week’s pop is something of a wake-up call, however, driven by a sales and earnings beat. Revenue of just under $2.9 billion may have only been up 3.1% year over year, but it was also slightly more than expected. Per-share profits of $0.31 nearly tripled the year-ago comparison of $0.11, also topping analysts’ consensus of only $0.04 per share.

And it’s perhaps this last detail that means the most to would-be buyers. Think about it. Even if Chewy only musters single-digit sales growth from here (as is expected), the e-commerce company’s scale has reached a profit tipping point. Look for profit margins to widen dramatically going forward even with just modest revenue improvement.

Unexpectedly strong sales growth would have an even more bullish effect on the bottom line. The stock’s recent surge out of its long-term rut simply says people are starting to see and believe this is what’s in the cards. That’s really the only thing patient shareholders have been waiting on to get shares moving like this on a more sustained basis.

And fortunately, there’s still plenty more room to recover.



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