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This Growth Stock's Potential Just Increased By $5 Billion

By Parkev Tatevosian, CFA – Sep 9, 2021 at 9:15AM

Key Points

  • Chewy is making a push for market leadership in pet health.
  • The humanization of pets is getting folks to spend more on the well-being of their pets.
  • Chewy is modeling a few of its services similarly to Amazon's.

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Chewy's total addressable market for pet health increased to $35 billion from a previously estimated $30 billion.

Online pet supplies retailer Chewy (CHWY -3.67%) is making major strides in the pet industry. The company was already growing revenue and customers at a healthy pace and then was boosted at the pandemic onset as shopping migrated online. 

The size of the pet market is growing as the humanization of pets is catching on. Folks are paying more attention to their furry companions' well-being, and Chewy is positioning itself to serve the growing needs of pet parents. 

A group of dogs playing.

Image source: Getty Images.

The overall pet health market grew by $5 billion 

In the fourth quarter of 2020, Chewy's management highlighted that the estimated market size of pet healthcare was about $30 billion annually. Fast forward two quarters later, and management updated that figure to note that the rapidly growing market is now estimated to be worth $35 billion in annual sales.

Chewy is making a concerted effort to be the leader in the pet health market. For one, it offers existing customers of its Autoship program (a service similar to Amazon's (AMZN -3.03%) subscribe and save) free access to its telehealth service Connect With a Vet. The service is available seven days a week until 11 p.m. EDT, 365 days per year. Unsurprisingly, Chewy management says customers are loving it and have given it high ratings.

Moreover, in its fiscal second-quarter shareholder letter, Chewy management announced launching a marketplace for veterinarians directly on Chewy.com. This service is comparable to third-party sellers on Amazon.com. Veterinarians can leverage Chewy's digital and physical infrastructure to serve their own customers. And like Connect With a Vet, the service will be offered for free -- at least to begin with. It is reasonable to assume Chewy intends to monetize the services later down the line.

Lastly, after launching last fall, Chewy's medication compounding service for pets is gaining traction, growing net sales by 50% sequentially from the first quarter to the second quarter of fiscal 2021.

Management hopes that the three services will collectively gain Chewy a leadership position in the rapidly expanding pet health market. It is still very early in its development, and it remains to be seen if the efforts will pan out. 

What this could mean for investors

In the near term, these initiatives are likely to lower profit margins and cash flows. The telehealth service is offered for free to existing customers, which is essentially a promotion that attracts new customers and helps keep existing customers satisfied. The marketplace for vets is also a free service, where Chewy will bear some costs in development. The compounding service is the only one of the three that is directly generating revenue and profits. 

Eventually, if Chewy executes the initiatives well, they would all add to revenue and profits. Chewy could charge a flat-rate percentage commission on each sale made by third-party sellers on the vet marketplace. The revenue could come with high profit margins because, after the initial cost of setting up the technology to initiate the capability, Chewy will incur few incremental costs on each sale. And instead of offering the telehealth service for free, Chewy could start asking customers to pay. 

Overall, the good news for shareholders is that the size of the pet health market is growing rapidly. Pet parents are increasingly looking for products and services that improve and maintain the well-being of their pets. Investors should be pleased with management's expansion in an area of fast growth within the company's range of competencies. 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Parkev Tatevosian owns shares of Amazon and Chewy, Inc. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends Chewy, Inc. and recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

Stocks Mentioned

Chewy Stock Quote
Chewy
CHWY
$41.72 (-3.67%) $-1.59
Amazon.com Stock Quote
Amazon.com
AMZN
$88.25 (-3.03%) $-2.76

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