Chewy (CHWY 27.14%) is a pure-play e-commerce business focused on serving pet owners. The stock went public in 2019, and since then, shares have outperformed, rising from an initial offering price of $22 per share to about $84 as of this writing. The business is seeing rapid adoption from pet owners -- a trend that has accelerated during the pandemic -- thanks to its focused offering and expansion into new product lines.

Let's see if Chewy has what it takes to be the next great e-commerce stock.

A person pets an attentive dog while both sit on a bench next to windows.

Image source: Getty Images.

What is Chewy?

The company was founded a decade ago and has a simple focus of being a primary shopping destination for pet owners by offering a wide selection of items and services a pet might need through its online store. It has three main product categories: consumables, hardgoods, and other. The consumables category is mainly for food and treats, and it made up 68% of total sales in the fiscal 2021 first quarter.

One of Chewy's most popular features is Autoship, which offers customers a discount on items if they order them on a schedule with regular deliveries. Just over 69% of overall sales now come through the Autoship program, and those customers have free access to licensed veterinarians through the company's Connect With a Vet telehealth service as well (more on this later).

Hardgoods are non-food items like toys, bowls, and other accessories, while the other segment includes food and treats from its private-label brands, products for animals other than cats and dogs, and its healthcare initiatives. As of the latest quarterly report, other revenue made up 15.8% of the company's business and was the fastest-growing of its three segments.

Financials look strong

Chewy's business has seen strong momentum with the big shift to e-commerce caused by the COVID-19 pandemic. In the fiscal first quarter, net sales grew 32% year over year to $2.14 billion, adding to the 46% growth in the prior-year period. Net margin inflected to a positive 1.8%, and the business generated $59.5 million in free cash flow. The company now has 19.8 million active customers, up 32% year over year, with net sales per active customer (measured on an annual basis) growing 8.7% to $388 in the period.

Like Amazon and other first-party online retailers, Chewy has low margins. However, fiscal first-quarter gross margin expanded from 23.4% to 27.6%. Expanding margins with scale is something shareholders will want to see continue over the next few years and beyond.

All of these numbers show customers seem to love what Chewy has to offer as they spend more with the company each year. This has led Chewy's trailing-12-month revenue to grow from $3.88 billion in the fiscal 2019 first quarter to $7.66 billion just two years later. Management is guiding for $8.9 billion to $9.0 billion in sales for the current fiscal year, meaning the company's rapid growth can continue even as COVID restrictions have eased in many areas of the country.

CHWY Revenue (TTM) Chart

Data by YCharts.

Moving into new business lines

One way Chewy is looking to fuel this continued growth is by moving into new product categories beyond pet food, treats, and accessories. Its biggest current initiative is Chewy Health, which encompasses all of its healthcare and pharmacy offerings. Customers now have access to over-the-counter medicine, online veterinarian consultations, and prescriptions (what it calls Petscriptions). Over 7,000 clinics and veterinarian partners are now a part of Chewy Health.

Chewy Health will help keep customers coming back to the company's website and mobile app, and it can also help build out Chewy's moat by making it the most comprehensive online pet offering that even retail giants like Amazon and Walmart can't match.

But what about the valuation?

Chewy currently has a market cap of $34.8 billion. Based on the $9.0 billion revenue guidance for fiscal 2021, the stock trades at a forward price-to-sales ratio of 3.9. It hasn't generated consistent profits, so it's tough for investors to value the company with a traditional earnings multiple. But looking at its gross margin, investors shouldn't expect particularly high earnings or cash-flow margins for this business, even at maturity. 

Taking these factors into consideration, Chewy's valuation doesn't appear too expensive, but it's no bargain, either. If you believe the company can continue capturing more of the $100 billion spent on pets in the United States each year, its leadership position makes the stock a convincing buy. On the other hand, stay on the sidelines if you're skeptical Chewy can maintain its growth trajectory long term.