Etsy (ETSY -1.27%) and Chewy (CHWY -0.12%) have fallen out of favor on Wall Street in recent months. Their stocks are trailing the S&P 500 so far in 2023 despite expanding sales and steady profitability.
Investors are worried about slowing sales trends for both e-commerce specialists. The pressure on the businesses would be amplified by a recession, too. But these issues don't threaten the long-term outlook for these companies, which are growing market share in attractive retailing niches.
Let's look at some good reasons for investors to consider buying Etsy and Chewy stocks at today's discounted prices.
Etsy is adding buyers
In early May, Etsy reported mixed results for its online marketplace. Overall revenue rose 11%, but sales volumes declined slightly as consumer spending shifted away from popular categories like home decor. Net income fell modestly but remained in solidly positive territory at $75 million, or 12% of sales.
Look beyond those headline figures and you'll see plenty of reason for optimism, though. In early 2023, Etsy's buyer base started growing again even as peer eBay shed 7% of its buyer pool. Sellers didn't balk at the latest fee increase, either, as Etsy's take rate rose to 21% of sales.
These fees will give management plenty of resources it can direct toward growth initiatives aimed at improving the shopping experience and adding more seller services to the platform. That's the best way to lay the foundation for a strong earnings rebound once the broader industry returns to growth.
Chewy is ready for a rebound
The biggest knock on Chewy in recent months is that its business is struggling to find new customers. The pet supply specialist's shopper pool fell by 1% in the fourth quarter and the 2022 fiscal year. A return to growth in this core category is essential for Chewy's wider ambitions.
This small slump happened under highly unusual circumstances, though, as a growth hangover struck the industry following huge demand spikes throughout the pandemic. Chewy also increased prices significantly to offset rising costs. Average annual spending per customer jumped to $500 in 2022, in fact, from $430 a year earlier.
Investors are worried that Chewy might report declines in its customer base when the company announces Q1 results in late May. Yet shoppers appear to be thrilled with its service: More than 73% of sales last quarter came from its subscription-based offering.
That success suggests that customer growth will return over the next few quarters as cost pressures ease. But the more exciting prospects for this stock include the company's expansion into niches like pet health and insurance. Chewy is also taking its brand international, and investors will learn the identity of that first new market in just a few weeks.
Chewy's profitability and its focus on pet essentials like food also help reduce the risk of owning this growth stock if a recession develops in the U.S. over the next few quarters. And as with Etsy, Chewy's shares are down so far this year even as the wider market is up 8%. Investors should consider the discounts as good reasons to take another look at these stocks.
