Pets are bigger business than ever.
Pet adoptions spiked during the pandemic, and spending on pets has continued thanks to trends like the humanization of pets, with more Americans treating their pets like children.
Two companies that capitalized on that trend are Chewy (NYSE: CHWY) and Freshpet (NASDAQ: FRPT). Both stocks have generally delivered strong growth but offer different ways to get exposure to the pet industry. Let's size up both of them in order to determine which is the better buy today.
Image source: Getty Images.
Business model: Chewy vs. Freshpet
Chewy is the leading pure-play e-commerce company in the pet industry, and it's built a loyal customer base through its autoship program that sends customers pet food and other products on a regular basis. Chewy also sells a wide range of products, making it easy for customers to use it as a one-stop shop for all of their pet needs.
The company has about 115,000 stock-keeping units (SKUs) across products and services from 3,500 of the best brands in the pet industry. Its product selection includes pet pharmaceuticals and even pet insurance.
Freshpet, on the other hand, sells fresh, refrigerated pet food. The company is best known for its refrigerated rolls of dog food that are sold in branded refrigerators in supermarkets and pet food stores. It's a premium product, and it's tapped into the desire for pet owners to feed their pets better quality food.
Freshpet has its products in more than 26,000 stores, and it's expanding in the U.S. and abroad, while adding new products.
It has the leading brand in its category, and its production facilities and branding create barriers to entry as well as a competitive advantage.
Both companies have strong business models that have given them competitive advantages. Chewy is the clear leader in e-commerce for pet products, while Freshpet dominates in fresh, refrigerated pet food.
Financials: Chewy vs. Freshpet
In recent financial results, there's a significant difference between the two companies.
Chewy, which was growing rapidly early in its history, especially during the pandemic, has seen growth decelerate significantly in recent quarters. In the second quarter, the company reported just 2.6% revenue growth, reaching $2.86 billion, and its revenue growth has slowed over the last several quarters.
Much of the pet industry, including rival Petco, faced sluggish growth in the post-pandemic era due to inflationary pressure and a reversal of the pet-spending boom during the pandemic.
Chewy did report strong growth on the bottom line as its gross margin improved and it controlled costs.
Freshpet, on the other hand, has bucked the broader trend in the pet industry, reporting 26% revenue growth to $253.4 million in the quarter, showing the continuing strength of the business. In fact, that marked its 25th consecutive quarter of at least 25% growth. At the same time, Freshpet has also delivered solid-margin expansion, and its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) nearly doubled to $43.5 million.
Valuation: Chewy vs. Freshpet
Valuation is also a key metric to assess for any stock.
Chewy currently trades at a price-to-earnings (P/E) ratio of 28, though that includes substantial stock-based compensation.
Freshpet, on the other hand, is more expensive as it's valued according to its track record of growth. The stock currently trades at a P/E ratio of 170.
Neither company pays a dividend.
What's the better buy?
Both companies have promising long-term prospects in the pet-products industry, but Freshpet gets the edge due to its much stronger growth rate.
The company has scaled up effectively with a new efficient manufacturing plant, and it continues to expand its product reach through new stores. Chewy, on the other hand, is struggling to find new avenues for growth in the current environment.
Freshpet might be the more expensive of the two stocks, but it's the better buy thanks to its strong growth.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chewy and Freshpet. The Motley Fool has a disclosure policy.
