The stock market has climbed over the past year -- and confirmed its presence in bull territory recently when the S&P 500 reached a new high. Growth stocks have led these gains, as environments of expansion and optimism generally support these sorts of players. Still, some promising growth stocks have missed out on the momentum so far.
One glaring example is Chewy (CHWY 2.99%), an e-commerce site for everything your pet needs -- from food and toys to health insurance. Chewy reached the key milestone of profitability in 2022, and last year, in spite of a difficult economic environment, continued to grow revenue and keep customers coming back. The company even launched important growth projects. Still, the stock hasn't followed, falling 55% over the past year.
Considering these points, is Chewy a stock to buy, sell, or hold? Let's dig deeper and find out.
Image source: Getty Images.
Chewy's revenue and profitability
First, a little background on Chewy and its progress so far. As mentioned, Chewy sells a wide variety of pet care products and services. Customers like this one-stop-shop, where they can not only buy all they need for their furry and not-so-furry friends -- but they also can benefit from extras like online vet visits. This has helped Chewy grow revenue over time and recently turn that trend into profitability.
CHWY Net Income (Annual) data by YCharts
And Chewy has tripled net sales and doubled active customers since its initial public offering back in 2019.
What I particularly like about Chewy is an element that offers us clues about future revenue, and this is the company's Autoship service. Autoship automatically reorders and delivers to your door your favorite products that you use regularly, such as your pet's food. And Autoship sales make up about 76% of the company's total net sales. So most of Chewy's sales come from regular customers who've committed to shopping on this e-commerce site.
This is positive because it shows the company has what it takes to build a loyal customer base -- and this group has proven its intention to keep shopping with Chewy.
Now, let's talk about growth potential ahead. Chewy launched two key initiatives last year that could greatly expand revenue over time. The company made its first move into international territory, expanding into Canada. This hasn't involved major investment so far thanks to the strength of Chewy's current e-commerce infrastructure. And, importantly, Chewy sees the Canadian market on par with the U.S. when it comes to market share and potential profitability.
The company says demand in Canada has been strong so far, and Autoship sign-up rates are "healthy" there.
Chewy Vet Care
As for the company's second big growth move, Chewy recently announced "Chewy Vet Care," veterinary practices that will include routine care, urgent care, and surgery. The company is opening its first practice in South Florida early this year.
This is a brilliant move because it broadens the revenue base by completing the Chewy offering -- now to include in-office vet care -- and it gives Chewy a whole new platform to introduce its e-commerce services to pet owners. Some may not have yet used Chewy, but once they visit one of its veterinary practices, they might be tempted to try the e-commerce platform.
Even prior to the international expansion and veterinary practice launches, Chewy had become a leader in the area of pet care. The company is the largest pet specialty retailer in the U.S. and is the biggest pet pharmacy in the country too. And the U.S. pet total addressable market of $144 billion offers Chewy plenty of room to grow.
Buy, sell, or hold?
Now, let's get back to our question. Should you buy, sell, or hold Chewy right now? Earnings and demand for Chewy's products have climbed, yet the share price hasn't followed. This might have you wondering whether the stock will ever take off -- and may discourage you from buying or prompt you to sell the shares. But before you do that, consider that Chewy still is in the very early stages of its growth story and only has been a public company for a few years -- and during times of upheaval, including early pandemic days followed by a tough economic period.
Today, Chewy's shares trade for only 26x forward earnings estimates, a steal considering the earnings performance so far and prospects ahead. And it's important to focus on the idea of long-term investing, which means holding on to a stock for a number of years. Chewy may not take off immediately, but if the company continues along the path it's traveled so far, it could deliver significant returns over the long haul.
So, I wouldn't be bothered by Chewy's share performance and instead use this as an opportunity to buy this player with enormous potential.
