It's been a tough past three years for Chewy(NYSE: CHWY) shareholders. After soaring during the early days of the pandemic, Chewy shares have since fallen more than 80% from their early 2021 peak. Even with their recent strength, shares remain 79% below that high.
As the adage goes, though, past performance is no guarantee of future results. Interested investors might want to dive into this beaten-down name while they can still get it at this price, which might not last for long.
Chewy isn't like the others
If you live in one of the 86.9 million U.S. households that the American Pet Products Association says is home to at least one pet, you almost certainly know what Chewy is. Even if you're not a pet owner, though, you probably know it is one of several pet-supply retailers serving U.S. consumers.
What you might not realize, however, is just how different Chewy is from rivals like Petco, Petsense, and PetSmart. Whereas these familiar names are established brick-and-mortar stores that also manage e-commerce platforms, Chewy was established in 2011 to only operate online. And it has stayed true to its mission. That has made a world of difference, too.
Like most other categories of retailers, pet-supply chains now recognize they built too much of a brick-and-mortar presence between the late 1980s and the early 2000s. They have also struggled to adapt to the advent of e-commerce, which is best supported with a different kind of warehousing and logistics infrastructure.
Not Chewy, though. Built from the ground up to function strictly as an e-commerce outfit, it has thrived in this role. Record-breaking first-quarter revenue of nearly $2.9 billion was up a little more than 3% year over year, extending a long streak of progress.
CHWY revenue (quarterly), data by YCharts.
This growth rate is obviously slowing. Keeping the slowdown in perspective, however, sales soared during and because of the pandemic when Chewy stood ready to handle the swell of online shopping; comparisons are subsequently tough now.
And the retailer is still growing at a time when consumers are not only doing more in-person shopping again but are also showing more caution with their spending.
Also note that Chewy's profit growth is accelerating even though top-line growth is slowing. That's largely a function of size and scale.
In the right place at the right time
More important to interested investors, the same growth is expected to continue for several reasons. Chief among them is the continued growth of e-commerce itself.
As big as e-commerce has become, the Census Bureau reports that only 16% of the nation's retail spending is done online. This leaves the other 84% up for grabs. Obviously, much of this spending will never be done online. But Mordor Intelligence believes the country's e-commerce market is set to grow at an annual rate of nearly 15% through 2029.
As for spending on pet supplies like food, toys, and medicine, it's only likely to continue growing at a single-digit pace, in line with last year's 7% improvement, according to numbers from the American Pet Products Association. Market research outfit Packaged Facts, however, predicts 44% of the United States' spending on pets will be done online by 2028, up from last year's 37%. This implies double-digit growth within Chewy's corner of the pet-supply market.
And analysts largely agree that the company will be able to capture a large share of this growth. The analyst community predicts this year's expected top line of $12 billion will swell to $15.3 billion in 2028. Profits are expected to continue growing at an even faster clip, too, from this fiscal year's forecast of $0.25 per share to a consensus of $1.71 four years down the road.
Data source: StockAnalysis.com. Chart by author.
Again, size and scale are making an exaggerated difference in the bottom line.
Sooner is better than later
Anyone interested in stepping into a new stake in Chewy should be forewarned: Excessive volatility almost certainly awaits. This isn't just a meme stock; it's one of the market's most-watched meme stocks, heavily targeted by short-sellers but also heavily touted by traders hoping to spark a short squeeze. There's plenty of push and pull here.
Just keep the bigger picture in mind, having faith that all stocks eventually reflect the value of the company they represent.
Of course, with 17% of this stock's outstanding shares currently being shorted, the prospect of a short squeeze taking shape sooner rather than later actually seems pretty high. The stock has already started to test the waters of higher highs, in fact, putting its short-sellers on notice. One good nudge could get that ball rolling.
With or without such a near-term boost, though, with Chewy's shares down 79% from their all-time high, they are an attractive long-term bet here and now.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chewy. The Motley Fool has a disclosure policy.
