Don't look now, but pet stocks are no longer rolling over and playing dead. Shares of Rover (ROVR) surged 15% higher on Wednesday, an otherwise dreary day of trading. A strong financial update fueled the rally. Rover is now trading 74% higher in 2023, but that came after plummeting 62% last year.
Freshpet (FRPT 1.31%) and Chewy (CHWY 2.99%) also disappointed investors in 2022. Those two stocks surrendered nearly half their value. Freshpet is playing fetch this year, beating the market with a 40% year-to-date return. Chewy is still working its way out of the doghouse, but it's showing signs of life since bottoming out in May.
Investors gravitated to pet stocks in early 2020 when dog and cat adoptions started to spike. Folks were hunkering down at the onset of the COVID-19 crisis, and it made sense to take in furry friends as new members of the family. The stocks sold off in 2022, but it's not as if consumers are spending less on their pets now. Let's take a closer look at Rover, Freshpet, and Chewy -- and why brighter days are ahead for all three investments.
1. Rover
Rover is leading the way as pet stocks claw their way back in 2023, and this week's strong second quarter justifies the enthusiasm. For the company behind the leading app that connects pet owners with local sitters, walkers, and boarding solutions, revenue soared 35% for the three months ending in June.
The top-line uptick is actually the weakest at Rover in more than two years, but it was well ahead of what analysts and Rover itself were expecting. It's also better than the 33% increase it posted for all of 2019, proving that Rover's business is much stronger now than before the pandemic.
Image source: Getty Images.
The bullish catalysts are there for Rover's taking. The puppies and kittens folks took in three years ago are older but still require supervision. With companies calling employees back to the office, this will continue to be a tailwind for pet owner interest in Rover's platform. Improving travel trends should also spur an increase in appointments with pet sitters and boarders.
This is a scalable model. Margins are improving, and Rover surprised Wall Street pros by breaking even in the second quarter. Analysts were bracing for a small loss. With Rover boosting its guidance again, it shows that the strong quarter wasn't a fluke. Rover is roving, and right now, that's a good thing.
2. Freshpet
Freshpet is also beating the market this year. Its line of refrigerated pet food has been growing consistently despite the rocky stock chart. Quarterly revenue has grown by 26% or better for 19 straight quarters, which makes sense. Once you upgrade your pet's diet, you're not likely to switch back. It will try to stretch that streak to 20 when it reports next week.
Freshpet's hook is that it was the first to strike deals with supermarkets and other mass-market retailers to place branded coolers in their stores. Your local grocer, convenience store, or non-pet foods retailer isn't likely to let a second branded cooler into a store, and that makes Freshpet a uniquely positioned pet food stock with a potent moat.
Freshpet has doubled its market penetration to 10 million homes over the last four years, and it's not showing any signs of slowing down. Revenue growth has actually accelerated for six straight years, a welcome contrast to companies where sales growth decelerates as they mature. Freshpet recently increased its capacity, paving the way to support its growing base of households with growing pets that will naturally eat even more.
3. Chewy
Chewy won't report fresh financials for a few more weeks. Its fiscal second quarter ended last week. However, the online retailer of pet supplies did move sharply higher the last time it posted earnings results. The 15% increase in net sales was its strongest year-over-year increase in over a year.
The turnaround is even more impressive on the bottom line. Chewy is now profitable, but Wall Street isn't getting the memo. Analysts have been targeting small losses for the last four quarters, only to find Chewy generating positive net income each time. Wall Street sees more red ink this time around. Don't be surprised if Chewy comes out on top again.
Chewy's challenge lately has been growing its customer base. It actually declined slightly last year, but it did post sequential improvement last time out. In June, it announced its first push into international expansion with an entry in Canada. With its now consistently profitable business starting to stabilize, heading into the Great White North could be the ticket to getting its stock to move northward.
