One of the more notable victims of the 2022 bear market was the e-commerce industry. Most companies revolving around e-commerce took a massive hit, and even Amazon lost over 55% of its value at one point. Nonetheless, most of these companies have moved past the slump and resumed revenue growth -- although their shares have not necessarily followed suit.
Despite an 87% drop from the 2021 high, online products retailer Chewy (CHWY 2.99%) did not experience a yearly revenue decline. And now that it is profitable, investors might want to consider a position before more prospective shareholders take notice.
The state of Chewy as a company
E-commerce companies have difficulty competing with Amazon. As an e-retailer with numerous other businesses, it appears able to afford to operate its online sales business at cost or even a modest loss if segments such as AWS, advertising, and others drive company earnings.
However, the fact that Amazon's e-commerce is a more transactional business leaves competitors space to add a personal touch to their businesses, which is precisely Chewy's approach. It makes its customer service available 24/7. It also adds personal touches, such as mailing handwritten cards to customers and sending flowers after a pet passes.
Chewy's financials seem to reflect the success of this approach. In the first half of 2023, revenue of $5.6 billion increased 15% compared with the same period in 2022. This included a 15% increase per active customer in both the first and second quarters, likely aided by an autoship program that automates recurring purchases.
Chewy used this increase to invest in its business, and operating expenses rose 20% during that time. Consequently, the net income of $41 million rose less than 1% year over year.
What investors have overlooked
Despite this progress, investors have responded by taking Chewy's stock to an all-time low. Yet, its valuation points to an emerging bargain. The price-to-sales (P/S) ratio, which had reached 7 at the height of the 2021 bull market, has fallen to 0.8. Moreover, the forward P/E ratio is down to 35, another all-time low. And this comes at a time when Chewy has forgone profits to improve its business.
Still, Chewy's forecasts point to revenue growth between 10% and 12% for the year. That implies a growth slowdown in the second half of 2023. Admittedly, a big risk for Chewy stock is the price inflation that has likely dampened some enthusiasm for spending on pets. Inflation tends to reduce demand or shift consumers to lower-cost options. Still, after peaking at 9.1% in the middle of last year, it now stands at 3.7%. That implies the slowdown could be temporary.
Consider Chewy stock at current levels
At current levels, Chewy looks like an excellent buy. Admittedly, inflation is a negative for Chewy's growth, at least for now. And its investments in the company have lowered profits, which raises its forward P/E ratio. Nonetheless, Chewy has managed to stay competitive on price while adding a personal touch to its sales process. This and its autoship program reinforce customer loyalty.
Such factors are an excellent reason to capitalize on the stock's sharply fallen levels. Once Chewy moves past the period of high inflation and starts to reap the rewards of its investments in the company, the internet and direct marketing retail stock should finally change course and begin its next bull market.
