What happened
Shares of pet e-commerce company Chewy (CHWY 1.92%) jumped 21.5% in January, according to data provided by S&P Global Market Intelligence. And the upside hasn't ended for shareholders yet. As of market close on Feb. 2, Chewy stock is now up 33% in 2023, ahead of the 8.7% jump for the S&P 500 so far. And a lot of Chewy's gains have to do with Wall Street's growing optimism for the company in the coming year.
So what
Chewy's pet products aren't made for pachyderms, but let's start with the elephant in the room nevertheless. Growth wasn't overly impressive in 2022. Through the first three quarters of 2022, Chewy's net sales are only up 13.7% from the comparable period of 2021. And based on management's fourth-quarter guidance, full-year net sales are only expected to be up 13% year over year.
Most of Chewy's net-sales growth came from higher spending per active customer. In fact, the company's 20.5 million active customers are down from the 20.7 million it had at the start of 2022.
Undeterred by these results, on Jan. 11, Needham analyst Anna Andreeva said that Chewy stock was her top pick for 2023, according to The Fly. Specifically, Andreeva believes that the company's active customers will keep spending more throughout 2023, leading to more net-sales upside. And that's why she believes the stock can reach $55 per share, implying roughly 10% more upside from where the stock trades as of this writing.
Andreeva isn't alone with her price target of $55 per share. On Jan. 27, Wedbush analyst Seth Basham joined her, raising his price target from his previous target of just $35 per share. And according to The Fly, Basham is more encouraged with Chewy's profit margins going into 2023.
This bullish commentary from analysts coupled with improving market sentiment led to outperformance for Chewy stock.
Now what
Q4 results for Chewy aren't expected until March. But circling back to Basham's comments gives shareholders something important to watch for. The company has been automating its fulfillment centers and that has led to improving profitability. In the first three quarters of 2022, it had cumulative net income of $43.1 million.
It appears that automation combined with higher sales is leading to Chewy's improving profitability. Automation is poised to increase in 2023 with new fulfillment centers. Therefore, shareholders should expect further gains in profitability with higher sales.
If higher sales indeed lead to better profits, it's a signal that this crucial part of the investment thesis for Chewy is on track, which is why I suggest watching this metric in coming quarters.
