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Buy This High-Growth Stock Hand Over Fist Before It Gets Too Late

By Harsh Chauhan - Jun 22, 2021 at 8:45AM

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This e-commerce stock is trading at an attractive valuation and is showing no signs of slowing down.

This hasn't been a good year for Chewy (CHWY -3.52%) investors. Share prices of the online pet retailer have retreated sharply after a terrific start, driven mainly by a broader sell-off in tech stocks and concerns about a drop in sales in a post-pandemic scenario. The downtrend continued after Chewy's latest results, which failed to appease investors despite turning out to be better than expected.

Chewy also raised its full-year guidance, but the stock fell on worries about supply chain constraints that affected sales during the quarter. However, this is a great opportunity for investors to add a high-growth company to their portfolios as Chewy's momentum is still strong and will be here for a long time to come, thanks to the secular catalysts it is sitting on.

CHWY Chart

CHWY data by YCharts

Chewy's terrific growth continues

Chewy's revenue for the first quarter of fiscal 2021 increased nearly 32% year over year to $2.14 billion, exceeding the higher end of its guidance range and the Wall Street forecast of $2.13 billion. The company's gross margin jumped an impressive 420 basis points over the prior year as customer spending improved and freight costs went down to normal levels after spiking last year in the wake of the COVID-19 outbreak.

The stronger gross margin filtered down and helped Chewy post a net margin of 1.8%, a jump of 480 basis points over last year. The company's adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) of $77.4 million was a substantial increase over the year-ago period's figure of just $3.4 million. Adjusted EBITDA margin came in at 3.6% during the quarter, up from just 0.2% a year ago.

The company also posted a profit of $0.09 per share, while analysts were expecting it to incur a loss of $0.03 a share. In all, Chewy delivered solid growth across the board last quarter, driven by a sharp increase in its customer base and drove additional spending from each customer.

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The company exited the first quarter with 19.8 million active customers, a 31.6% jump over last year. Chewy's net sales per active customer increased 8.7% year over year to $388. It is worth noting that customer growth has remained outstanding even after the lifting of shelter-in-place restrictions and the return to normalcy. Additionally, Chewy's sales to each active customer have also picked up the pace in recent quarters.


Q1 2020

Q2 2020

Q3 2020

Q4 2020

Q1 2021

Active customers (in millions)






Year-over-year growth






Net sales per active customer






Year-over-year growth






Data source: Chewy's quarterly shareholder letters.

Moving on, Chewy's days of high growth won't be over anytime soon. Let's see why.

Why things can get better

Chewy's customer base has increased by 75% in the past couple of years, driven by the pandemic as pet parents turned to online shopping to meet their needs. The company says that its active customers start spending more on its products and services as time passes. More specifically, Chewy's customers have historically spent $400 in their second year with the company, which goes up to $700 by the fifth year and to $900 by the ninth year.

So, Chewy's revenue and margins can rise substantially over the next three to four years as net sales per active customer move north. Throw in the fact that the online pet retail channel is still in its early phases of growth, and it becomes easier to see why the company will keep adding new customers over the long run.

Chewy estimates that the online channel will account for 53% of pet products and supplies in the U.S. by 2025 as compared to 30% last year. The company is in a nice position to take advantage of this growth thanks to a solid share of the online pet retail market.

These tailwinds tell us why Chewy has increased its full-year revenue guidance. The company now expects $8.95 billion in revenue this year as compared to the earlier estimate of $8.9 billion, indicating a year-over-year increase of 25% to 26%. The adjusted EBITDA margin is expected to increase in the range of 80 basis points to 120 basis points.

Analysts expect Chewy to maintain these impressive growth rates in the long run, believing that its earnings could increase at a compound annual growth rate (CAGR) of more than 130% for the next five years. Revenue growth is also expected to be more than 20% for the next two fiscal years.

All of this makes Chewy a great growth stock to buy right now given that it is trading at 4.2 times sales after its pullback -- down from 2020's average multiple of 5.6 -- and investors shouldn't miss this opportunity as it offers great upside potential.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool recommends Chewy, Inc. The Motley Fool has a disclosure policy.

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