Please ensure Javascript is enabled for purposes of website accessibility

This Top Growth Stock Is on Sale in April

By Harsh Chauhan - Apr 2, 2021 at 6:45AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This company's hot growth streak appears to be solid and ready to make a long run.

Chewy (CHWY 3.77%) was my top growth stock to buy a month ago, as the stock price of the online pet products retailer had pulled back substantially amid concerns that it would lose momentum in a post-coronavirus world. But the company's prospects indicated that those fears were unfounded.

Now Chewy's latest results for the fourth quarter of fiscal 2020 that ended on Jan. 31, 2021, provide further proof that its stellar growth is here to stay. The company's revenue and earnings blew past Wall Street's expectations. Investors liked what they saw, and share prices spiked thanks to a surprise profit.

What's more, Chewy shares have slipped further over the past month, which means there's a better opportunity now for investors to buy into this high-growth company. Let's see why it would be a good idea to take advantage of this opportunity and buy Chewy stock.

CHWY Chart

CHWY data by YCharts

Chewy kept up its terrific growth in a post-COVID scenario

Chewy's fiscal fourth-quarter revenue shot up 51% year over year to $2.04 billion, outpacing the company's full-year revenue growth of 47.4%. The company's gross margin jumped 300 basis points over the prior-year period to 27.1% during the quarter, while the net margin increased 550 basis points to 1%.

The revenue and margin gains pushed its earnings to $0.05 per share for the quarter, reversing the year-ago period's loss of $0.15 per share. Wall Street was expecting Chewy to incur a loss of $0.10 per share on revenue of $1.96 billion. It easily cleared those estimates thanks to a solid increase in its customer base and an uptick in spending by each customer.

Chewy ended the fourth quarter of 2020 with 19.2 million customers, a big jump of almost 43% over the prior-year period. Net sales per active customer jumped 3.3% year over year to $372. More importantly, Chewy's new customer acquisition pace increased in the fourth quarter compared to the third quarter. The company saw a 40% spike in reactivations of idle customers -- those who haven't made purchases on Chewy in the past year -- during the quarter, while customer retention went up by 240 basis points.

Buy stock button on a keyboard.

Image source: Getty Images

These numbers tell us that Chewy is successfully executing its strategy of adding new customers and driving additional spending. In fact, Chewy's wallet share among its 2020 customers was 12% higher than the customers it had added in 2019.

This strategy of driving increased wallet share has helped Chewy increase its first-year contribution profit (calculated as gross profit minus variable costs) from each new customer at an annual rate of 16% over the past two years. The results are visible in its improved bottom-line performance last quarter.

Also, it is worth noting that Chewy is building a sustainable stream of revenue for the long run through its Autoship subscription program. Autoship revenue was up 46% year over year in the fourth quarter to $1.39 billion and accounted for 68.2% of the company's total sales. The Autoship program allows pet parents to automatically reorder their recurring needs from Chewy, so a large portion of the company's revenue from this segment looks stable over the long term.

A bright future lies ahead thanks to secular catalysts

Chewy's business has remained strong even a year after the novel coronavirus pandemic shook the world. The gains that the company has scored over the past year seem here to stay, and that's evident from its guidance.

Chewy anticipates revenue between $2.11 billion and $2.13 billion this quarter, a jump of 30% to 31% over the prior-year period. The company anticipates 24%-to-25% revenue growth for the full year, while the adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margin is expected to increase in the range of 50 to 100 basis points over fiscal 2020.

However, don't be surprised to see Chewy grow at a faster pace in fiscal 2021. The company has taken just two years to hit the $2 billion quarterly sales mark after taking 7.5 years to reach its first $1 billion in quarterly sales. There's no doubt that the pandemic has aided this growth, as pet parents staying home had to resort to online supplies. But at the same time, the pandemic has created long-term growth drivers for Chewy.

Chewy estimates that the number of pet-owning households increased 5.7% in the U.S. in 2020, a huge boost over the five-year compound annual growth rate (CAGR) of 0.6%. This has increased the company's addressable market. Additionally, the online pet products market still has a lot of room for growth. The online channel accounted for 30% of the pet retail food and supplies category last year. That number is expected to reach 53% by 2025.

With Chewy taking proactive steps to boost its market share by adding new customers and encouraging them to spend more on its platform, the company looks well-placed to maintain its impressive growth rates over the long run by taking advantage of the secular catalyst it is sitting on. That's why investors looking for a potential growth stock should take advantage of Chewy's recent drop, as it could surge higher in the long run.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Chewy, Inc. Stock Quote
Chewy, Inc.
CHWY
$24.19 (3.77%) $0.88

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
322%
 
S&P 500 Returns
116%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.