Over the past six months, Chewy’s shares (currently trading at $22.58) have posted a disappointing 12.9% loss, well below the S&P 500’s 11.7% gain. This may have investors wondering how to approach the situation.
Is now the time to buy Chewy, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Chewy Not Exciting?
Even with the cheaper entry price, we’re passing on Chewy for now. Here are three reasons why CHWY doesn’t excite us, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years. Regrettably, Chewy’s sales grew at a tepid 7.1% compounded annual growth rate over the last three years. This was below our standard for the consumer internet sector.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Chewy’s revenue to rise by 6.8%. This projection is underwhelming and suggests its newer products and services will not catalyze better top-line performance yet.
3. Low Gross Margin Reveals Weak Structural Profitability
For online retail (separate from online marketplaces) businesses like Chewy, gross profit tells us how much money the company gets to keep after covering the base cost of its products and services, which typically include the cost of acquiring the products sold, shipping and fulfillment, customer service, and digital infrastructure.
Chewy’s unit economics are far below other consumer internet companies because it must carry inventories as an online retailer. This means it has relatively higher capital intensity than a pure software business like Meta or Airbnb and signals it operates in a competitive market. As you can see below, it averaged a 29.6% gross margin over the last two years. Said differently, Chewy had to pay a chunky $70.42 to its service providers for every $100 in revenue.
Final Judgment
Chewy isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 10.4× forward EV/EBITDA (or $22.58 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We’re pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at one of our top digital advertising picks.
Stocks We Like More Than Chewy
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