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Better Buy: Amazon vs. Chewy

By Rick Munarriz – Aug 14, 2020 at 10:19AM

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One stock owns e-commerce, but the other owns your feed bowl. Let's see which market beater will come out on top.

There's something to be said about branding in the growing world of e-commerce. The first time that you heard about Amazon (AMZN 0.58%), it probably conjured images of the namesake Brazilian rain forest instead of what originally started as an online bookstore with grand ambitions. Chewy (CHWY -0.58%) is a more recent entry into the e-tail lexicon, but it's also not a dot-com outlet for chewing gum or fans of Star Wars' lovable Wookiee. 

Amazon is now the undisputed leader in online retail. Chewy is growing even faster as a rising star in e-commerce for pet food and supplies. Both stocks are handily beating the market in 2020, but which one is the better buy right now? Let's put the two intriguingly-named online retailers to the portfolio shopping test. 

A dog resting in front of a calculator, pen, and currency.

Image source: Getty Images.

The top dog

Amazon is everywhere these days. With $322 billion in trailing revenue and commanding the country's second largest market cap as of Friday morning, it's the platform that doesn't need much of an introduction. 

As big as Amazon may be, it still knows how to floor it on the open road. Net sales soared 40% to $88.9 billion in the second quarter, its largest percentage increase on the top line in more than two years. The pandemic has naturally picked up the cadence of Amazon orders as folks shop for essentials and just about anything else from the safety and comfort of home. But with net sales accelerating in four of the past five quarters, it already had momentum on its side before brick-and-mortar shopping choices became limited. 

Amazon is more profitable than you think. Net income doubled in its latest quarter. Trailing free cash flow is clocking in at $31.9 billion. The company is about more than just online retail. It's a leader in cloud-based hosting services. It owns the leading brick-and-mortar organic grocery store chain. It's a major player in the digital delivery of video, e-books, audiobooks, and music. It's a true new-economy juggernaut, but now let's turn our attention to a smaller company that's growing even faster. 

The new dog

It's been just 14 months since Chewy raised $1 billion in its IPO. The stock has shot 148% higher, as of Thursday's close, since pricing last year's debut at $22 a share. The online retailer of pet supplies is one of the companies that has found a way to beat Amazon at its own game. Amazon sells a ton of pet-related merchandise, but Chewy's growing faster as it caters specifically to your furry friends. 

Chewy's top line rose 46% in its latest fiscal quarter. Its customer base now tops 15 million, and with a surge in pet adoptions this year, it's easy to see that shopper count expanding at a faster percentage than Amazon's base. Chewy knows how to keep customers close with its Autoship feature, where folks can keep replenishing their feeding dish and treat stash at set intervals. A whopping 68% of the sales in its latest quarter came from Autoship orders. 

The comparisons aren't as kind at the other end of the income statement. Chewy isn't profitable, and analysts don't see it turning that corner until 2023. Profitability shouldn't be a deal breaker for investors eyeing promising growth stocks at this stage in their growth cycles, but it's a point that deserves to be brought up.

Both retail stocks have the right ingredients to keep beating the market in the near future. But the better buy here has to be Chewy -- especially for risk-tolerant investors. It is growing faster, and it's easy to see how the online pet supplies market will expand faster than e-commerce in general the way that pet ownership and humanization trends are climbing in the new normal. 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Chewy, Inc and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Amazon Stock Quote
$93.95 (0.58%) $0.54
Chewy, Inc. Stock Quote
Chewy, Inc.
$40.96 (-0.58%) $0.24

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