There's no question that Chewy (CHWY -4.85%) has changed the pet products industry. With a pure-play e-commerce model and a customer-first approach, Chewy has proven that an online pet supplies store is a viable business model, dismissing memories of disasters like

However, while the company delivered solid top-line growth over its history, it has struggled more recently with the post-pandemic hangover in the pet food industry, and it is only minimally profitable.

Is Chewy a buy today? Here's what two contributors have to say.

A Shiba Inu dog.

Image source: Getty Images.

Disrupting the pet food sector

Parkev Tatevosian (Bull case): One of my favorite aspects of Chewy stock has been how skillfully management has run the business. The e-commerce pet retailer has grown sales at a rapid clip. Of course, the pandemic was a boom for its business, but Chewy was thriving even before the outbreak. All this happened while it expanded its gross profit margin and narrowed its operating losses. 

Indeed, Chewy's sales rose from $901 million in 2016 to $8.9 billion in 2022. Its customers appreciate the pet-only focus and an auto-ship feature that automatically sends your pet's food to the front door. In its most recent quarter, ending Oct. 30, 73.3% of its sales came from the auto-ship channel.

Chewy expanded its gross profit margin from 16.6% to 26.7% between 2016 and 2022 through various methods, including price increases and adding Chewy-branded products that sell at higher margins. Investors should be encouraged by the demonstrated economies of scale. As Chewy grows its top line, it will likely help expand the profit margin.

That will be a huge help because the company is not consistently profitable on the bottom line, though it is moving in the right direction. Chewy's operating losses decreased from $338 million in 2017 to $72 million in 2022. There is no guarantee this trend will continue, but it is an excellent sign for investors.

CHWY Chart

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Along with the broader market crash in 2022, Chewy's stock has become less expensive when measured by the price-to-sales ratio of 1.8, down from a peak of over 6 in the earlier stages of the pandemic. In the near term, Chewy's prospects may be challenging as reopening economies shifted consumer spending away from online categories. However, that may already be priced into Chewy's lower valuation. 

Competition is heating up

Jeremy Bowman (Bear case): Chewy's rapid growth in the pet products industry has certainly been impressive. The company has staved off Amazon and asserted itself as the clear e-commerce leader in online pet products, but that hasn't gone unnoticed by the competition. Competitors like Petco Health and Wellness (WOOF -7.53%) are increasingly stepping up their own online offering. In fact, Petco's hybrid model offers some advantages that a pure-play like Chewy doesn't have.

Petco can sell products both in stores and online and it can use its stores for online pickup and shipping, saving money compared to shipping from a faraway distribution center. Petco can also offer higher-margin services in store like grooming and veterinary care. And Petco stores can also offer products that aren't easily sold online like refrigerated Freshpet foods, which are taking market share in the industry and are now among the top sellers in the pet food industry.

Chewy also trades at a premium valuation to its peers even though it is barely profitable. Though its price-to-sales ratio has come down as the chart above shows, at 1.7, it's still significantly higher than Petco's, which is now 0.4, not to mention Petco's forward price-to-earnings ratio of just 12. While it is growing more slowly than Chewy, I think those numbers make Petco a better buy.

Finally, Chewy's direct sales model has historically been a low-margin or money-losing one for companies like itself, Wayfair, and Amazon. While the company did report a slim profit under generally accepted accounting principles (GAAP) in its most recent quarter, it will be difficult for it to increase margins without adding more profitable business lines, especially as competition heats up.