What happened
Shares of pet-oriented e-commerce company Chewy (CHWY 2.99%) rallied by 4.5% Tuesday.
E-commerce companies have been especially hard-hit over the past 18 months or so, as receding COVID-19 concerns brought consumers back to stores, high inflation hindered discretionary spending, and rising interest rates lowered the present values of companies' future earnings. That especially hurts growth stocks that are earning minimal profits today, such as Chewy.
However, Chewy got a double-dose of good news Tuesday: A Wall Street analyst praised the company and put a buy rating on the stock, while new macroeconomic data made lower inflation and lower interest rates look more likely going forward.
So what
On Tuesday, Wall Street sell-side analyst Dan Carden of William Blair gave Chewy a buy rating, which seemed to go against the grain following the stock's 22% swoon over the past month and 29% decline on the year.
Chewy had been thought of as a leading retailer to the highly engaged niche of pet owners, but amid slowing growth this year, investors have become skeptical on the stock -- especially as interest rates kept rising.
In its last earnings report, the company displayed some signs of recovery, with 14.7% revenue growth. That was a solid rate, but far below the 30% to 50% growth rates seen during the pandemic, for obvious reasons. And while net income was positive, it was just over breakeven at $22 million.
With a market cap that's nearly $12 billion today, Chewy has to prove it can keep growing to justify its valuation. And it certainly didn't help matters that while revenue per customer grew last quarter, the overall number of active customers actually declined slightly relative to the prior year.
However, Carden thinks Chewy can continue to grow its customer base, writing, "...while the general refrain from bearish investors is that the company is most likely tapped out in terms of new customer growth.... Net customer growth can ultimately come in ahead of expectations."
In addition to the defense from an analyst, Chewy was likely also helped by Tuesday's lower-than-expected job openings data from July. That pointed to a cooling economy, which could help bring inflation down even further and potentially induce the Federal Reserve to put its interest rate hikes on pause. Lower inflation and interest rates would be especially beneficial to growth companies that presently have low earnings, such as Chewy.
Now what
Chewy will report its second-quarter results after the close of trading Wednesday. While investors should be encouraged by Tuesday's analyst note, Chewy remains a risky stock due to its high valuation and uncertain market size.
Also, what appears to be good macroeconomic news for the company could prove to be a double-edged sword. If the declining job openings foreshadow a larger slowdown or recession, it's possible customers could continue to dial back their spending, trade down to cheaper pet food, or buy and adopt fewer pets.
With this much uncertainty, I would recommend waiting to see results and hear from management Wednesday before deciding if Chewy's stock is worth your investment dollars.
