Why Financial Pros Are Growing Bullish on Chewy

When Chewy (CHWY) went public in 2019, shares traded at $36. Today, they’re down at $22.

In between, the stock rode the meme craze as high as $120.

But like most bubbles, investors realized the company wasn’t profitable…yet.

However, Chewy finally turned a profit in the last 12 months and is pumping out close to $500 million in operating cash and $250 million in free cash.

With double-digit revenue growth and a rabidly loyal customer base, financial pros are finally taking a REAL look at Chewy for long-term holds, according to our Trackstar data.

Here’s why…

Chewy’s Business

Revolutionizing pet care with a click, Chewy has emerged as a dominant force in the online pet industry. This innovative company offers a comprehensive range of products and services, creating a one-stop-shop for all things pet. 

Chewy has earned acclaim for exceptional customer service and an in-depth understanding of what pets and their parents need. 

The company segments its business into the following areas:

Consumables (69% of total revenues) – The backbone of Chewy’s revenue, this segment encompasses a variety of pet food, medicines, and consumables. Popular brands like American Journey and Tylee’s contribute to this segment’s profitability.

Hard Goods (15% of total revenues) – Comprising durable pet products such as toys, supplies, and health items, this segment is anchored by the Frisco brand.

Others (16% of total revenues) – This diverse segment includes Chewy’s extended services, such as healthcare, insurance, and veterinary solutions, illustrating the company’s broad market appeal.

Chewy’s recent quarterly earnings revealed a substantial revenue increase, reflecting their successful expansion into new product categories like customized pet diets and eco-friendly supplies.

It doesn’t hurt that more pet retail sales keep moving online.

Source: Chewy Investor Day Presenation

Strategically, they are intensifying efforts in AI-driven recommendations and customer engagement tools, aiming to personalize the shopping experience and foster long-term loyalty among pet owners.

Financials

Source: Stock Analysis

Chewy’s revenues just before and after they went public.

However, it wasn’t until the last 12 months that the company turned a P&L profit and had decent free cash flow.

With very little debt, management can spend and invest in their business, expanding margins and enhancing growth, which is forecast at 15% average annual adjusted EBITDA (essentially cash flow).

Valuation

Source: Seeking Alpha

On paper, Chewy doesn’t appear cheap. It trades at 885x earnings. However, if you exclude stock-based compensation, it trades at 55x.

But price-to-cash flow is a better measure to watch. At 21x operating cash, Chewy does better than all its peers save Petco Health and Wellness Co. (WOOF). With margins improving and decent revenue growth, price-to-cash flow will only get better.

Growth

Source: Seeking Alpha

After multiple tears of double-digit revenue growth, Chewy forecasts sub-10 % growth for the first time since its IPO.

We feel this is conservative.

The company has multiple avenues to increase sales, from international expansion to pet insurance and organic pet care products.

What we don’t know is how long it will take them to get there.

Profitability

Source: Seeking Alpha

Chewy’s profitability falls short of its peers. Ideally, its margins would resemble Petco Health and Wellness Co. or better since Chewy doesn’t have a physical footprint to manage.

However, Chewy’s free-cash-flow margin is better, implying its overall business is healthier than its peers.

Our Opinion 8/10

Chewy drives brand loyalty better than 99% of companies out there, not just in pet care.

The key to its future lies in exploiting additional channels and driving down costs.

We believe Chewy has an excellent management team capable of achieving these goals.

While this won’t be a high-growth stock, it’s one that you can make money on and feel good about owning.