Like other pandemic darlings, Chewy (CHWY 2.99%) has taken its shareholders on a wild roller-coaster ride in the past few years.
If you invested in this pet e-commerce stock at its IPO price of $22 in June 2019 and held until its all-time high in Feb. 2021, you would have seen a remarkable 440% gain. But as of this writing, the stock is down 84% from its peak, and it currently sits below that IPO price from more than four years ago.
Some investors might view the shares as too cheap to pass on right now, while others think it's best to avoid Chewy stock. To see who's right, let's review the bull and bear arguments.
What the bulls say
Bullish investors will talk about Chewy's growth potential. This business isn't posting the monster revenue gains it did in fiscal 2020 and 2021 (47% and 24%, respectively), but it's still expanding at a healthy clip. Last fiscal year (ended Jan. 29, 2023), sales jumped 14%, and in the latest quarter, revenue was up 8% year over year.
There are two major trends that should help Chewy continue growing over the long term. One is the ongoing rise of online shopping, which has been a change that has transformed the economy for more than two decades.
The other is pet ownership. In the U.S., 66% of households have a pet, a figure that has steadily climbed over time. And according to Chewy CEO Sumit Singh, the industry for pet products is estimated to be worth $130 billion in the U.S. alone, which should fuel Chewy's growth.
This company has done a fantastic job generating a recurring revenue stream. Chewy offers the Autoship program, a subscription-like service that delivers pet products on a scheduled basis. In the fiscal third quarter, 76.4% of overall revenue was derived from Autoship, a penetration rate that's up more than 3 percentage points from the year-ago period. This trend of higher recurring sales has occurred over the past few years.
From Chewy's perspective, having more customers signed up for the Autoship program helps drive customer stickiness and loyalty, while at the same time requiring less marketing spending. And it gives the management team greater visibility when making financial forecasts. It's encouraging to see sales in this area rising.
What the bears say
Bears won't hesitate to call out the fact that Chewy's user base is shrinking. The company currently has 20.3 million active customers, down from 20.5 million in Q3 2022. To its credit, average spending per active customer was up nearly 14% year over year.
However, the macroeconomic headwinds can't be ignored. Discretionary spending is under pressure. Inflationary concerns and higher interest rates could be affecting pet ownership too.
"Pet household formation is muted, and it's muted because of the high kind of pressures that consumers are seeing from every direction," Singh said on the latest earnings call.
Worries about the economic environment led management to cut its full-year guidance. Executives now expect revenue to increase just 3% in the current quarter, effectively bringing fiscal 2023's full-year growth down to 10%. There could be more troubles on the horizon for this business before things start to improve.
Chewy has successfully carved out a niche in a lucrative corner of the e-commerce market, but it has invited intense competition from other companies. Petco is one such business. There are also larger, well-known players in the space like Amazon and Walmart, two formidable opponents any e-commerce specialist has to deal with. They have the financial resources and distribution capabilities to be successful in the pet category.
As a result of this competition, it might become more expensive for Chewy to attract and retain customers in the years ahead, which could make it even more difficult to improve profitability. Chewy's quarterly operating margin has stalled near breakeven the past few years.
Chewy's shares are also trading at a price-to-sales multiple that's more than 5 times Petco's. To be fair, both stocks sell for less than a single year of sales, but relatively, the market has much higher hopes for Chewy.
What Chewy has accomplished up to this point is admirable, but I think the bear arguments outweigh the bullish ones. As a result, I'm not adding the stock to my portfolio.
