The secret to achieving above-average returns isn't complicated. You just need to own the right stocks of the right companies operating in the right industry at the right time.
Of course, just because something isn't complicated doesn't mean it's easy. It's difficult to remain patient enough to wait for such opportunities and then stick with them when things look uncertain. It can be just as challenging to ignore all the distraction of seemingly more promising investment prospects in the meantime.
With that as the backdrop, if you're looking for a great growth stock to buy while it's down 74% from its all-time high, put Chewy(NYSE: CHWY) on your radar if not in your portfolio. After a sizable post-pandemic pullback, it looks like the market's finally starting to reward its past, present, and potential future.
Chewy is different in one important way
Even if you don't live in one of the two-thirds of U.S. households that's home to a pet, thanks to a healthy dose of television commercials, you're probably familiar with the brand name. Chewy has been supplying pets with food, toys, and medicines since 2011. The $13 billion company does roughly $11 billion worth of business per year.
What you may not readily realize, however, is that unlike its rivals like Petco, PetSmart, and Tractor Supply's Petsense, Chewy doesn't operate any physical stores that consumers can visit. It's a purely online operation.
At first blush it seems like a missed opportunity. While there's no denying e-commerce has made a major dent in brick-and-mortar retailing's reach, most shopping within the United States is still done in stores. The pet supply industry is no exception.
This strategic decision has proven brilliant in the bigger picture, though.
Unlike the aforementioned PetSmart and Petco (and to a lesser degree, Petsense) that established their physical footprints before pet-care e-commerce existed, Chewy was built from the ground up with only e-commerce in mind. It's optimized for online shopping and its required logistics. That's in contrast with most pet store chains managing legacy brick-and-mortar businesses with physical footprints that are too big and too inefficient.
The thing is, the best is yet to come for the online piece of the pet-care business.
Plenty of growth ahead
Like any other category of shopping, a fair amount of consumers' spending on their pets has migrated online. Not as much as you might think, though. Between the sheer weight of the average-sized bag or case of pet food and the fact that it's somewhat perishable, the bulk of this business is still done in stores.
This continues to change, however. With more scale, experience, and information to work with, companies like Chewy are better equipped to offer consumers more of the price and convenience they increasingly crave.
That's what the numbers suggest, anyway. While consumer research outfit Packaged Facts predicts the U.S. pet market is poised to grow 4.9% from last year's total to $152.3 billion this year, the e-commerce sliver of the business is faring much, much better.
A MetricsCart report says the online arm of the industry is on pace for 2024 growth of 12.3%. Indeed, Business Research Insights projects that the worldwide pet-care e-commerce market is going to grow at an annualized pace of 11.4% every year through 2032, with most of this growth materializing within the U.S. market Chewy serves. For numerical perspective, Bloomberg Intelligence believes the United States' online pet-care market is going to double between last year and 2030, when it will be worth $60 billion.
Already being the leading player in the nation's online pet supply industry (Bloomberg Intelligence estimates Chewy's control at 36% of the U.S. market that includes Amazon's sales of pet-related goods), Chewy is positioned to win a notable share of this growth, extending and even accelerating its top- and bottom-line growth.
CHWY Revenue (Quarterly) data by YCharts
Chewy stock brings more reward than risk to the table
The backstory and bullish outlook beg the question: Why is Chewy stock down 74% from its peak? Chalk it up to extraordinary -- but temporary -- circumstances.
Like so many other publicly traded e-commerce companies, Chewy shares soared during and because of the COVID-19 pandemic. It wasn't until 2022 that investors finally looked back and realized that while this company's potential is enormous, the stock's price rallied too far and too fast given the results being produced at the time.
As is so often the case, however, the sellers overshot their target; the bear market of 2022 loaned them a helping hand. The recovery that first took shape for Chewy stock in early 2023 partially unwound this overzealous selling, but shares are still arguably undervalued given the bigger-picture opportunity ahead.
Oh, there's risk here, to be sure. Namely, Chewy is only marginally profitable, and even though it's the top name in terms of online pet supply sales, it's competing with much bigger companies like Walmart and the aforementioned Amazon. These rivals have the financial wherewithal to take dead aim at a smaller competitor.
Chewy's smaller size and hyperfocus are proving to be more of a competitive edge than a liability, though, and that's not likely to change in the foreseeable future. Now's the time to take a shot with Chewy before any more investors figure this out.
Should you invest $1,000 in Chewy right now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Chewy, and Walmart. The Motley Fool recommends Tractor Supply. The Motley Fool has a disclosure policy.
