Chewy (CHWY -2.54%) stock got caught up in the bothersome tech stock "crash" in March, falling as much as 40% from all-time highs at one point. But this is no e-commerce mutt.
Despite intense competition for "pet parent" spending, Chewy has an established pedigree as a top player in the online animal companion space. And after a stellar fourth-quarter 2020 report, shares look like a solid buy. Here are three reasons why.
1. Chewy is a tech innovator for your four-legged friends
With plenty of e-commerce competition out there, Chewy may seem like an improbable success story. After all, retail has seen a sizable amount of consolidation in recent years as many consumers look for a single location to get all of their basic necessities -- think Amazon or Walmart.
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But pet parents are a different breed of consumer and are fiercely loyal to their four-legged companions. The purchase of food and other basics (which Chewy automates with the option to auto-ship on a regular schedule) is only just scratching the surface. CEO Sumit Singh explained on the Q4 conference call that spending on pets is worth about $100 billion a year in the U.S. alone -- and it's expected to expand to $120 billion a year by 2024. Chewy currently competes for about 70% of these potential dollars via its food, diet, and prescription offerings, but it is expanding its reach to compete for the other 30%.
To that end, Chewy recently launched new services like personalized products (such as collars and tags with a pet's name and its human's contact info) and its telehealth service Connect With a Vet. Yup, that's right. If you like visiting with a healthcare professional via video conference, your pet can now do the same with a licensed veterinarian. More than just a convenient way to stock up on food and other basic supplies, Chewy is turning itself into an e-commerce innovator for families' non-human members.
2. Catering to pets is scaling up to profitability
Chewy's lack of profitability has kept many investors away from the stock, but the red ink on the bottom line is quickly disappearing. The company reported 5.7 million net new customers in 2020 and ended the year with 19.2 million in total. As a result of this (plus an increase in average customer spending), revenue surged 47% higher to $7.15 billion.
The big jump in sales helped Chewy swing from an adjusted EBITDA loss of $81 million in 2019 to an adjusted EBITDA profit of $85.2 million in 2020. Granted, this is a thin margin of just 1.2%, but it's nonetheless a significant milestone for a growth company that is spending heavily to promote expansion and to get into new pet industry categories (like the aforementioned pet telehealth offering).
Chewy plans to continue acquiring new customers at a rapid pace and add new services to its stable. Management's resulting outlook for 2021 calls for a 25% to 26% increase in revenue to $8.9 billion (at the midpoint of guidance) and for adjusted EBITDA profit margin of 1.7% to 2.2%. Not bad, Chewy.
3. This doggy is for sale at a premium, but not a "mad dog" price
When factoring for the 2021 outlook and Chewy's recent tumble, shares look like a reasonable long-term value. The stock trades for four times expected 2021 revenue and about 50 times 2021 adjusted EBITDA -- certainly on the premium end of the spectrum for a retail stock, but not totally crazy given the company's growth and fast-expanding industry in the U.S. Plus, Chewy hasn't started expanding outside of the U.S. yet, but a plan to do so is in the works.
Reasons for optimism
The start of 2021 has been rough going for Chewy shareholders after an epic 2020, but there are reasons for optimism. This leader in pet e-commerce is growing fast and innovating new services for the millions of households with an animal companion. It's time to give shares another look after the Q4 report card.
