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Got $1,000? 3 Reasons to Buy Chewy Stock

By Parkev Tatevosian - Mar 24, 2021 at 8:02AM

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Shares of this specialty retailer are down in the last month, but its long-run prospects are solid.

Chewy (CHWY -2.00%) is an online pet product and services retailer. It was already achieving years of rapid revenue growth, and when the coronavirus pandemic pushed consumers toward e-commerce, its sales growth accelerated. The number of COVID-19 cases is thankfully trending down in recent weeks, which can partly explain why shares of Chewy are also down over 20% in the past month. As people become more comfortable leaving their homes and returning to stores, sales at the online pet store could suffer.

Still, spending on Chewy.com has been increasing by at least 40% year over year in all but one quarter since the start of fiscal 2019 (not to mention the seven-year streak from fiscal 2011 through fiscal 2018) -- highlighting that a return to pre-pandemic conditions is no reason to shy away from this growth stock. In fact, if you have $1,000 that you're not going to need for several years, here are three reasons you should buy shares of Chewy stock.

A puppy with his paw on a laptop.

Image source: Getty Images.

1. Folks are growing closer to their pets

Pets are becoming an ever-increasing part of people's lives in the U.S. From 2013 to 2018, spending on pets grew 50% from $58 billion to $87 billion. Meanwhile, annual income during that same period grew only 23%. As the economy recovers from the pandemic and the recent $1.9 trillion American Rescue Plan puts more money into consumers' bank accounts, a growing part of people's budgets will likely go toward their pets. That will be a boon for Chewy shareholders.

Moreover, folks are bringing home new pets at an increasing rate since the start of the pandemic. During a survey in December, 10% of respondents indicated they brought home a new pet since the outbreak of COVID-19. And since owning a pet is a long-term commitment, this recent surge has the potential to sustain years of growth for Chewy and other segments of the pet industry.

2. Chewy's Autoship feature offers convenience and value

Just over 69% of sales in the company's most recent quarter came from Chewy's Autoship program, which allows customers to sign up for repeat deliveries of products with a small discount. In addition to the discount, typically 5%, Autoship customers get access to the company's Connect with a Vet offering, a telehealth service giving pet parents access to a licensed veterinarian at no additional cost.

Getting consumers to place their shopping on autopilot provides the company with several benefits. Autoship gives Chewy greater clarity into customers' order patterns, increasing efficiency at its fulfillment centers. And sales growth for Autoship customers tends to outpace overall sales growth. Now, with the addition of the Connect with a Vet service, pet owners have even more incentive to stick with Chewy long-term versus other pet supply retailers.

A smiling puppy outside on the grass.

Image source: Getty Images.

3. Approaching positive free cash flow 

In Chewy's fiscal 2020 third quarter, free cash flow totaled $33 million, up from negative $13 million in the same period last year. The figure enjoyed a boost thanks to an early start to the holiday shopping season.

The online pet store generated negative but improving free cash flow in its prior three fiscal years -- deficits of $120 million, $58 million, and $2 million in 2017, 2018, and 2019, respectively. And through the first nine months of fiscal 2020, Chewy more than doubled its capital investments, reducing the likelihood it has a positive year of free cash flow. However, those investments are focused on expanding the company's fulfillment capacity as Chewy prepares for continued growth in customer demand over the coming years. 

Even before the pandemic, pet parents were splurging more and more on their furry companions, and the pandemic led millions more people to bring a pet home. The convenience and value offered by Chewy.com should continue drawing in new customers while growing spending from existing ones. Investors with $1,000 to spare can feel good about adding Chewy stock to their portfolios.

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