Investors have lost some interest in the e-commerce space now that growth trends appear to be taking a step backward following several years of gains. Wall Street has decided that most players in the niche are no longer worth owning due to the short-term risks around weak sales and earnings.
That's a mistake.
Let's take a look at pet-focused e-commerce retailer Chewy (CHWY -0.12%) and see why the stock looks attractive today, representing a better value than it did just a few months ago. There are some good reasons to like this leading pet-supply provider.
Chewy is winning share
Chewy's last earnings update showed encouraging signs of continued strong sales growth. Sure, its 13% year-over-year revenue increase in the second quarter wasn't as exciting as previous increases. Chewy grew sales by 27% in the year-ago period, after all, thanks to booming demand for online sales and a spike in pet adoptions during more-shutdown-focused phases of the pandemic.
But its growth through late July still reflects rising market share in an expanding niche. Chewy's shoppers continued to spend money on its platform, in part because most of them have committed to regular shipments of consumables like pet food, treats, and other supplies. That makes the business sturdier than other e-commerce specialists who are seeing big sales declines today.
Chewy is also continuing to grow even as consumers were pinched by higher inflation pressure. Sales have jumped to $4.9 billion in the past six months from $4.3 billion a year earlier, demonstrating the resilience of pet spending even as consumers pull back in other areas.
Chewy has sparkling finances
Chewy isn't sacrificing profits to keep sales churning higher, either. In fact, adjusted net profits rose to 0.8% of sales through the first half of 2022 compared to 0.5% last year. Operating cash flow is still solidly positive, giving management plenty of room to invest in the business without needing to take on debt.
CHWY Cash from Operations (TTM) data by YCharts.
These financial wins should ease investors' concerns about risks around rising interest rates or a potential inventory write-down, should demand decline due to a recession. On the contrary, the percentage of sales coming from autoship customers has risen in the past year and is approaching 75% of the entire business.
The best news is that investors can own a piece of this stellar business for about 1.5 times sales today, while the P/S ratio was over 6 as recently as early 2021. Sure, valuations have declined across the board since that time. But Chewy is still valued at close to its lowest valuation in the past three years today.
It is true that the company isn't likely to easily cross 20% annual sales growth again any time soon. But it has a prime position in an attractive niche and a clear path toward boosting profit margins over time. These enduring advantages are what investors should focus on while tuning out the noise around quarter-to-quarter sales trends.
Chewy is on track to cross $10 billion in annual sales this year, up from $4.9 billion in 2019. Revenue gains will be slower in 2022 and harder yet to achieve in 2023. But Chewy should deliver solid returns for investors over the long term if it can keep growing its base of engaged pet owners.
