Is Chewy Stock a Value Play or a Risky Bet Like GameStop?

Everything it takes for a stock to rally to stratospheric levels in today’s market is a simple tweet. Given that there’s a large enough audience to act on information, a stock could seriously change the financial future of those who trade around it. Unfortunately, this isn’t far from the early 2000s ‘pump and dump’ schemes, where the head of the move came out a winner given a large enough following made the underlying stock move.

By the way, this is borderline illegal; that’s why Twitter (now X) user ‘Roaring Kitty’ chose a more subtle way to pump so-called ‘meme stock’ GameStop Corp. (NYSE: GME) and AMC Entertainment Holdings Co. (NYSE: AMC), which then came crashing down. Recently, after tweeting (X-ing?) a picture of a blue cartoon dog, Roaring Kitty made Chewy Inc. (NYSE: CHWY) stock fly by nearly 20% in a single day.

However, that pump was short-lived, as the stock sold off by over 6% on the week's last trading day. This doesn't mean Chewy stock is a company not worth a higher valuation, such as GameStop, and its weakening financials. Investors will benefit from understanding what's barking under the hood of Chewy so they can find out whether it'll become another 'meme' stock or an actual value play.

Why Chewy Stock's Financials Support Its Higher Price Levels

It’s all about free cash flow (operating cash flow minus capital expenditures) since, without it, companies won’t be able to run for long before they need to dilute shareholders or even take on debt to keep funding failing operations.

Lucky for Chewy shareholders, the company has plenty of cash flow. According to the first quarter 2024 quarterly earnings results, Chewy generated operating cash flows of $81.9 million. Accounting for the $29.3 million in capital expenditures, Chewy walked away with $52.6 million in free cash flow.

Every investor wants to hear what management did with this newfound profitability. A new announcement inside the earnings press release shows management approved a $500 million share buyback program, representing roughly 4.2% of the company’s total market capitalization.

This free cash flow also translates into earnings per share (EPS), which grew massively for Chewy over the year. In 2023, Chewy generated only $0.05 in EPS, which tripled to $0.15 for the same quarter this year.

Considering the company’s past performance and knowing that Chewy is more part of the consumer staples sector than the consumer discretionary sector, investors can expect continued stability in the company’s profits. Because of this, current Wall Street estimates seem to be on the conservative end of the spectrum.

What Wall Street Expects from Chewy Stock

It doesn’t seem like much after seeing a tripling in the company’s EPS, but it isn’t bad either. Analysts forecast EPS growth of 63.6% in the next 12 months, which could prove significantly above any of Chewy’s competitors, such as Petco Health and Wellness Inc. (NASDAQ: WOOF) and its projections for another net loss for the year.

The consensus price target for Chewy stock is set at $26.5 a share, implying that there is currently a 2.7% net downside ahead for the company. On the other hand, analysts at Guggenheim see the stock going to $32 a share. In contrast, Wedbush analysts expect an even higher level at $35 a share.

To prove these analysts right, the stock would need to rally by as much as 28.7% from where it trades today. By the way, today’s Chewy stock price is only 68% of its 52-week high, so investors now face a wide gap to close on the upside and deliver the rally these analysts are rooting for.

It doesn't matter whether the economy is booming or busting; people will likely always make room in their budgets for the family's furry members, especially regarding food and medicine. Because of this, more and more analysts could likely boost the stock's targets higher.

Chewy Stock's Momentum Attracts Institutional Investors

Unlike those holding the proverbial ‘bag’ on GameStop stock and others in the ‘meme’ category, Chewy’s momentum is now getting the attention of some of Wall Street’s most respected institutional asset managers.

Over the first quarter of 2024, the Vanguard Group boosted its stake in Chewy stock by 13.5%, bringing its net investment to $226.9 million today.

More than that, Baillie Gifford & Co., Chewy stock’s largest shareholder, also boosted their position. By how much? 7.2%, and while that allocation was less aggressive than Vanguard’s, it was also more recent as of May 2024. Baillie Gifford’s investment is now at the top at $315.3 million.

There has to be a reason why the market is willing to pay more for Chewy stock than the rest of the staples sector. On a price-to-book (P/B) basis, Chewy trades at 18.4x while the industry’s average stands at less than half at 5.9x.

Now investors have a few reasons to put their fingers on when figuring out whether Roaring Kitty’s tweets will make this stock less worthy than what it actually is.

The article "Is Chewy Stock a Value Play or a Risky Bet Like GameStop?" first appeared on MarketBeat.