Chewy.com (CHWY -3.27%) was one of the hottest stocks of 2020. Its share price increased by more than 200% in the year as more people ordered products from the online pet store. The company is the beneficiary of several macro trends that are helping it grow in scale.
One of those trends accelerated sharply at the onset of the pandemic: the shift from in-person shopping to online. However, this is something that most investors are well aware of. And it's generally more profitable to pick up on a trend before everyone else knows about it and it gets priced into the stock. The interesting macro trend I'll discuss below has not been widely discussed as a reason to own Chewy stock.
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Homeowners are more likely to own pets
In its most recent earnings release, management made a point to call out two major trends it's benefiting from: increasing pet ownership and accelerated e-commerce migration. While both points are absolutely true, they are already well appreciated and a major part of why the stock was up over 200% in 2020.
However, the one point that is certainly no secret but has not been widely discussed as a reason to own Chewy stock is that homeownership rates in the U.S. are nearing record highs. The coronavirus pandemic encouraged many families to move out of apartments and buy a home. According to the Federal Reserve Bank of St. Louis, the homeownership rate is 67.2%, which is near its all-time high of 69.4%.
For those of you who have owned a pet before, you might agree that even the small ones can take up quite a bit of space. Some families, mine included, would love to bring home a pet but are not doing so because of lack of space or a yard. With many more people having bought a home in 2020, it removes the space constraint from a portion of the population. In fact, one study found that homeowners were three times as likely to own a dog compared to non-homeowners.
Additionally, given that a home is usually a long-term commitment, it could increase pet ownership for many years. More pet owners mean more potential customers for Chewy. And the average pet parent in the U.S spends more than $1,000 annually.
What this could mean for investors
Chewy already counts 17.8 million people and growing as customers. The move away from physical shopping to e-commerce is only gaining steam. While more than two million people have been vaccinated for COVID-19 in the U.S., the end of social distancing measures still seems many more months away. Meanwhile, people will continue to look to pets to cope with loneliness. And with record-low interest rates stoking demand for already elevated homeownership levels, people will have more space to accommodate owning more pets.
It's all pointing to increasing sales for Chewy. It remains to be seen, however, if the company can turn surging demand into profits. The company has not yet reported a quarter with positive net income, but if it continues increasing revenue at the pace it did in 2020, it will only be a matter of time before this growth stock turns the corner and becomes profitable.
