3 Reasons Why This Beaten-Down Stock Is a Terrific Buy

Share prices of online pet products retailer Chewy (CHWY -2.54%) plunged after the company's results for the third quarter of fiscal 2021 revealed a bigger-than-expected loss thanks to multiple headwinds such as supply chain problems, labor shortages, and cost inflation.

The stock price tumbled 8% following the release of Chewy's results on Dec. 9, which means that it has now lost nearly 39% of its value in 2021.

CHWY data by YCharts

However, Chewy's steep decline in 2021 is an opportunity for savvy investors to add a top company to their portfolio as it is taking advantage of the fast-growing online pet products and supplies space. Let's look at three reasons why you should consider buying Chewy stock right now.

1. Chewy is successfully tapping into a fast-growing market

Chewy's Q3 revenue jumped 24% year over year to $2.21 billion, driven by an increase in the customer base as well as a jump in customer spending. The company exited the quarter with 20.4 million active customers, an increase of 14.7% over the prior-year period. Chewy's gross margin also expanded 90 basis points year over year during the quarter.

The company's net loss, however, remained flat year over year at $0.08 per share. Wall Street expected Chewy to post a net loss of $0.04 per share, but "rising inflationary pressures, supply chain disruptions, and chronic labor shortages" weighed on its bottom line. As a result, Chewy's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) remained nearly flat year over year at $6 million.

Image source: Getty Images.

Investors pressed the panic button at the sight of Chewy's weak bottom-line performance, but they are missing the bigger picture. More and more customers are buying pet products online than before. Market research firm Packaged Facts pointed out in May this year that 30% of pet product sales are now happening online. That's a major increase from just 8% in 2015. The company estimates that e-commerce will account for 53% of the overall pet products and supplies market by 2025, which translates into a revenue opportunity worth $50 billion for Chewy.

The impressive growth in Chewy's customer base and revenue indicates that it is doing well to seize the end-market opportunity. That's not surprising as the company reportedly holds a 41% share of the online pet retail market, which means it can sustain its impressive revenue growth as more customers purchase pet products online.

2. Wallet share gains will drive long-term growth

One of the key takeaways from Chewy's latest quarterly report was the acceleration in the company's net sales per active customer (NSPAC), which increased 15.4% year over year to $419 during the quarter. A higher NSPAC means that Chewy's customers are spending more money on its offerings, and the good part is that this metric has started increasing at a stronger pace over the past couple of quarters.

Data source: Chewy quarterly reports.

This acceleration in Chewy's NSPAC isn't surprising as its customers tend to spend more money on the e-commerce platform the longer they use it. In the second year, Chewy points out that customers spend $400 on its website, which goes up to $700 in the fifth year and $900 in the ninth year. What's more, the new customers coming into Chewy's fold are spending more money than those customer cohorts it added last year and the year before.

Chewy said in its shareholder letter that the average order value for new-to-Chewy customers was 6% higher than the third-quarter 2020 cohort and 13% higher than the third-quarter 2019 cohort. Now that Chewy has built a strong base of more than 20 million customers and is capturing a bigger portion of their wallets, the company should be able to sustain its impressive revenue growth as its customer base matures.

3. The valuation makes it worth buying

All this indicates that Chewy stock could eventually regain its mojo in the long run. The company's strong share in a fast-growing market and its ability to extract more money out of customers should result in robust top- and bottom-line growth in the long run, which is why it may be a good idea to buy this beaten-down stock right now.

Chewy is trading at just 2.9 times sales. This is lower than the S&P 500's price-to-sales ratio of 3.2. It is interesting to note that the S&P 500's current sales growth rate stands at 6.58%, which is way lower than the 25% growth that Chewy expects to clock in the current fiscal year. What's more, analysts expect Chewy to register 20%-plus sales growth even in the next fiscal year, which strengthens the bull case and makes the stock a growth stock to buy right now for long-term gains.