Chewy (NYSE:CHWY), the largest pure-play online retailer of pet food and supplies in the U.S., is a strong business with a clear path to grow long term, but does that make the stock a buy?

Chewy has grown rapidly since it launched in 2011, increasing its sales to $4.85 billion in its last fiscal year, which ended Feb. 2, 2020. Management's guidance calls for 40% growth to $6.80 billion of sales in fiscal 2020. That would mark an an acceleration from the previous year's 37% growth.

That's due in part to greater e-commerce adoption as a result of COVID-19. Chewy grew its number of active customers 27% last year, but that pace accelerated to 33% and 38% year-over-year in the first and second fiscal quarters, respectively. More people are flocking to online channels for their shopping, and Chewy has been a key beneficiary. 

A golden retriever eats dog food out of a dog bowl.

Image source: Getty Images.

The company has grown so big so fast despite plenty of e-commerce competition thanks to its singular focus on the pet category. Chewy boasts a large product selection, and 68% of its sales are to customers with active auto-ship programs. In addition, the company's investments in new distribution centers allows it to offer shoppers fast shipping with many packages delivered in just one or two days.

A big opportunity

There's a lot of room for Chewy to keep growing in the years ahead. The pet food and supplies market was $56.1 billion last year, and it's expected to grow over 5% annually for the next five years, according to the American Pet Products Association. Simply put, people love their pets, and pet spending data from the Great Recession -- when the market continued to grew year after year in the U.S. -- suggests Chewy is in an enviable position, even if the economy worsens going forward.

To top it off, e-commerce is capturing an increasing portion of the category as time goes on. The online channel accounted for just 7% of spending in 2015, but that figure more than tripled to 22% by 2019, according to Packaged Facts. That trend was expected to continue long term, but the coronavirus kicked it into overdrive this year.

As Chewy rides these dual tailwinds, the company can grow bigger and more profitable in the years to come.

High expectations

Long-term growth is great, but for stocks to really outperform, the shares need to trade at prices that reflect modest expectations. At $53 per share as of this writing, Chewy is up an eye-popping 83% year to date. So while its growth trajectory is attractive, the stock already reflects high expectations from the market.

For example, even if we take the previously mentioned industry forecast -- that the pet and supplies market grows 5% annually -- and assume the online segment increases to claim 50% of spending, pets-based e-commerce would grow to about $46 billion in the next decade. Give Chewy a dominant 50% market share with revenue of $23 billion in 2030, and that would be good for an average of 17% annual sales growth. As strong a showing as that would be, even those generous assumptions may not be enough to justify the current valuation.

Chewy is a good business that growth investors should want to own, but it might be wise to wait for a pullback before buying the stock.