Pet e-commerce company Chewy (CHWY 2.99%) is well loved by its customers, but investors have turned their noses up to the stock. The company went public in June 2019 at $22 per share. But as of this writing nearly five years later, Chewy stock trades at just $16.50 per share.
For its part, the S&P 500 index is up more than 80% since Chewy went public. Therefore, not only has Chewy been a bad investment so far, it has underperformed the market by a painfully wide margin.
The first five years have been disappointing for Chewy's shareholders. However, I see three good reasons to buy Chewy stock hand over fist today. However, no investment opportunity is devoid of risk, and there's one particular issue with this company that investors shouldn't overlook.
Why to buy Chewy stock today
The first reason to buy Chewy stock today is because it's cheap. That's not a good reason in itself -- the quality of the business is more important, and I'll get to that. But the valuation is compelling here.
Chewy stock recently traded at its lowest price-to-sales (P/S) valuation ever at just 0.6. And for those who prefer profits over sales, it trades at just 21 times its free cash flow, which is also inexpensive.
CHWY Price to Free Cash Flow data by YCharts
The second reason to buy Chewy stock is its growing profitability. The company has 16 fulfillment centers to support its $11 billion e-commerce business. But a few years ago, it started opening fulfillment centers with automation enhancements. Five fulfillment centers are now automated and are 30% more efficient than its other fulfillment centers, which helped unlock profitability for its retail business.
Chewy is also now making money from advertising with sponsored listings. This is helping boost its gross margin and could keep pushing profits higher as it scales.
Automation and advertising are just two examples of why Chewy's profits are growing. And this profit progress is another good reason to buy the stock.
The third reason to buy Chewy stock is that its market opportunity is extending far beyond retail products. In the coming year, management intends to open its first four to eight veterinary clinics. And the company also developed software to help operations at third-party clinics. This growth opportunity expands its market by $11.5 billion, according to management.
In summary, investors should buy Chewy stock hand over fist because it's cheap, profitable, and has a long runway for growth. However, there's one other issue to consider before buying shares.
Here's one reason to keep your head
I don't wish to communicate that everything with Chewy's business is pointing in the right direction -- it's not. Investors should remember that this is still primarily a retail business for now. And for some reason, the company can't seem to find new customers.
On March 20, Chewy reported financial results for its fiscal 2023, which showed that it had 20.1 million active customers. This was almost a 2% drop from fiscal 2022 and was the second straight year of losing active customers.
In its letters to shareholders, Chewy's management talks about how big the pet space is and how it continues to grow. E-commerce platforms also continue to take market share from traditional retail companies. And yet, the top pet e-commerce company hasn't seen customer growth for two years. That's concerning.
As with almost any stock, there's risk, and this applies to Chewy as well. The company will be hard-pressed to grow if it can't increase its customer base, so this is something for investors to watch.
That said, Chewy's recent struggles with customer growth don't nullify my aforementioned reasons to buy the stock today. Indeed, I believe Chewy stock is one of the better options for growth trading at a reasonable valuation.
