It's been a tough past couple of years for Chewy (CHWY 0.69%) shareholders. The stock soared during the early days of the pandemic, shortly after its initial public offering (IPO). But Chewy shares are now down 74% from their early 2021 peak, unable to live up to the once-incredible hype. Investors are throwing in the towel.

That's exactly when and why you should step into a position in a company with real prospects like Chewy, however. We've certainly seen such a stock-picking strategy pay off in the past.

Nothing unusual in Chewy's performance

Don't misunderstand. We've seen plenty of highly touted, publicly traded companies end up imploding, punishing all-too-patient shareholders as a result. Names like Ketarra, Groupon, Webvan, and Freshly are just some of the names that come to mind.

We've also seen many highly rewarding stocks bounce back from major post-IPO pullbacks. Shares of Meta Platforms -- back when it was Facebook -- sold off immediately after its 2012 public offering. It wouldn't start climbing in earnest until the latter half of 2013. Amazon stock wouldn't fully recover losses suffered between 2000 and 2001 until 2009. Prior to Elon Musk's acquisition of the company, Twitter stock soared shortly after its 2013 IPO but then started a four-year sell-off that would ultimately drag it more than 90% below its post-public offering peak.

The point is, don't jump to conclusions about Chewy just because it's yet another stock that cratered shortly after its IPO and pandemic-prompted rally. These are growing pains that most young, publicly traded companies go through. Chewy is no exception.

Chewy is clearly capitalizing on its strategic advantage

To this end, on the off-chance you're reading this and aren't familiar, Chewy is an online pet supply store complete with an online pet pharmacy.

It's been done before, albeit mostly by brick-and-mortar pet store chains like Petco and PetSmart. There's room for more than one such platform on the web, though. In fact, there may be room for several of these names. The American Pet Products Association estimates people in the United States alone spent $136.8 billion on their "fur babies" last year, up nearly 11% from 2021's tally. That's a tough act to follow, but Morgan Stanley estimates the U.S. pet market will still muster annualized growth of 8% through 2030.

Dog owner teaching the pet a trick.

Image source: Getty Images.

Clearly, this growth is up for grabs by anyone in the business. Chewy has something of an edge on its toughest competition, however. That's the fact that brick-and-mortar presences are costing more to manage with less and less fiscal benefit. Chewy isn't saddled with this baggage. It can wholly focus on optimizing its e-commerce operation.

And the company is doing just that. As Goldman Sachs analyst Eric Sheridan noted with his recent upgrade of Chewy (from neutral to buy):

[There has been] increased confidence in more stable customer growth and rising revenue trends [and] steady margin progression driven by gross margin expansion (reflecting revenue mix shift) and SG&A leverage as Chewy executes on its supply chain transformation and automation.

Make no mistake. E-commerce is where the bulk of the market's growth is coming from. Data from consumer research outfit Packaged Facts suggests 36% of last year's total pet spending was done online, well up from 2017's proportion of only 16% in 2017, en route to a figure of 45% as soon as 2026.

Chewy's past and projected fiscal results jibe with this outlook too. Last year's top line of $10.1 billon is 13.6% better than 2021's sales, and despite brisk inflation being a problem for the better part of the year, Chewy pumped up 2021's earnings before interest, taxes, depreciation, and amortization (EBITDA) from $78.5 million to $306 million last year.

The entire analyst community is optimistic about Chewy's foreseeable future as well. They're collectively calling for sales growth of more than 12% this year and more than another 11% next year. Next year's top-line growth, in fact, is expected to pump the bottom line up to a record-breaking profit of $0.19 per share. Things are expected to remain similarly hot at least through 2027.

Chart of Chewy's past and projected revenue and earnings growth.

Data source: StockAnalysis.com. Chart by author.

The tide could turn in an instant on Chewy

So, if the company's doing so well, why is the stock not reflecting that?

This is largely part of the usual post-IPO dance. A bunch of would-be buyers remain on the sidelines until it's clear all the pent-up selling has run its full course. The stock's also not followed by a great number of analysts -- at least not yet -- keeping it off of investors' radars. Meanwhile, many investors wait for more evidence that this company's got the viable future it's supposed to have.

Waiting on the sidelines, however, could ultimately prove to be a mistake. The circumstances like the ones currently holding Chewy shares down can evaporate in an instant. A catalyst as simple as an earnings beat could spark what becomes a major recovery rally.

To this end, know that Chewy is expected to report its second-quarter results sometime in late August or early September. That may be all the nudge this stock needs.