Share prices of Chewy (CHWY -1.09%) are down 18% year to date. Slowing revenue growth coming out of the pandemic and losses on the bottom line have weighed on the stock for the last year.
However, Chewy isn't going anywhere. Pets are part of the family, and Chewy is emerging as the go-to online destination for convenient access to a large selection of pet food and other essentials. Most importantly, the business is starting to turn a profit as it expands.
Here are three good reasons to buy and hold the stock for the long haul.
1. Chewy serves a growing industry
A surefire method of making sure you don't pick a dud in the stock market is to look for growing companies serving growing industries. It can be very difficult for a company to sustain the long-term growth needed to deliver market-beating returns when its industry is not growing. Chewy is an attractive growth stock to buy right now simply because pet care is on the rise.
Chewy's revenue already doubled over the last three years, but analysts at Morgan Stanley expect the pet industry to grow from $118 billion in 2019 to $277 billion by 2030. Chewy has a large selection of goods, fulfillment infrastructure, and service offerings (e.g. pharmacy) to capture this opportunity.
CHWY Revenue (Quarterly) data by YCharts
2. The company's profits are climbing
Chewy's share price collapsed with the broader market last year, mainly due to a high valuation on top of a business that hadn't turned a profit. But that is changing, which is an important reason the stock is set to rise in the next bull market.
Chewy reported a small profit of $6.1 million on $2.7 billion of revenue in the fourth quarter. It's a reversal of the losses the company had been reporting. Chewy is starting to benefit from supply chain improvements and growth from pharmacy and other high-margin services.
CHWY Profit Margin data by YCharts
"Over a longer time horizon, given the nascency of many of our initiatives, such as Private Brands, Chewy Health including Insurance, Sponsored Ads and more, we believe there is additional runway left for incremental gross margin expansion," CEO Sumit Singh said on the fourth-quarter earnings call.
Chewy is copying Amazon's playbook. It's not only offering an enormous selection of thousands of pet products, but it's also adding services on top of that, such as pharmacy and an auto-ship program, to build customer loyalty.
An improving profit margin makes Chewy look more like a genuine value at these lower share prices. The stock now trades at a price-to-sales ratio of 1.38, whereas Amazon typically traded around a 2-times sales multiple in its early years of growth.
3. More pet owners could be a revenue multiplier
The only negative here was the small decline in active customers last quarter, but that's understandable given the macroeconomic headwinds. Chewy expects to return to active customer growth this year.
There are currently 5 million more pets in the U.S. than 2019, according to research from Morgan Stanley and AlphaWise. That is expected to drive a significant increase in pet spending per household over the next several years.
Chewy is already capitalizing on these trends. It posted a 15% year-over-year increase in net sales per customer in the fourth quarter. This also indicates high customer satisfaction, which should help the company resume customer growth as more people learn about the service through word-of-mouth.
Amazon might be the only competitor that could knock Chewy out, but that seems less likely with every passing year that Chewy continues to expand its infrastructure and grow. The company ended 2022 with 17 fulfillment centers that can offer next-day delivery to 80% of the U.S. population. It's clearly the brand to beat in the pet market.
With a long runway of growth, this top pet food stock should be a rewarding investment.
