Pet e-commerce firm Chewy (CHWY -0.44%) has had a difficult start to 2024 with the stock losing about a third of its value so far this year. One of the biggest reasons behind this is that the company forecast overall pet industry growth to be modest this year and did not expect any big benefit from price increases.
However, the company still has a massive opportunity in front of it that investors may be ignoring. So is now the time to buy the stock?
A nice recurring business model
One of the first things to understand about Chewy is that it has a largely recurring business model. About 85% of its business comes from nondiscretionary items such as pet food and pet health products. Meanwhile, over 75% of its sales come from customers who are on autoship subscription programs. In 2023, it generated nearly $8.5 billion in sales from autoship customers.
Why is this important? Because it creates a lot of visibility into future sales. Investors like companies that are predictable, and those with recurring business are among the most predictable there are. As such, these types of stocks tend to get high valuations from investors.
What this type of business also creates is a large, loyal customer base that can be sold additional products, and that is where Chewy's big opportunity lies.
Pharmacy sales are a massive opportunity
Chewy has already become the largest online pet pharmacy in the U.S., but only about 20% of its customers use this service. This creates a massive opportunity for Chewy to sell these services to its existing customer base.
Pet medication is a huge market with over $12 billion in sales annually in the U.S. While pet medication sales have been shifting online for many years, sales through veterinarians still account for about 70% of pet pharmacy sales.
Since pet medications and veterinary visits tend to progressively get more expensive, there is a big benefit to both the consumer and Chewy to shift consumers to its much cheaper alternatives. Despite being able to offer medications at much cheaper prices than vets, Chewy still sees a huge margin uplift with pharmacy sales compared to the rest of its business. In fact, the company has said that its pharmacy segment margins can be 1,000 basis points higher than its retail operations margins.
Why is this important to investors? Because it means that pharmacy sales are not only a big revenue growth opportunity but also represent much more profitable sales.
Image source: Getty Images.
Driving health and wellness growth
To help drive awareness and sales for its health and wellness offerings, Chewy is also starting to build its own Vet Care Clinics. It plans to open between four and eight locations this year as it tests out the concept.
The company also has partnerships with Trupanion (NASDAQ: TRUP) and Lemonade (NYSE: LMND) to offer pet insurance. It takes on no underwriting risk in the partnerships and gets nearly 100% gross margin on the sales. Chewy also offers a telehealth platform where pet owners can consult with a vet online. Live text chats are free, while online video calls are $19.99 for 20 minutes, or free with some of its Careplus plans.
In addition, the company runs the PetMD website, which is filled with articles and educational pieces written by veterinarians. The site gets about 5 million users a month and is used to help drive these users to Chewy's website.
Chewy also connects directly with vets to help fill prescriptions through its PracticeHub platform. The platform lets vets review and approve subscriptions, and Chewy handles the inventory, fulfillment, and delivery.
All of these initiatives by themselves can help grow Chewy's overall business. However, their biggest benefit is that they can all help drive customers to Chewy's burgeoning pet pharmacy business.
Sell-off creates an opportunity
The sell-off in Chewy shares has led to the stock being at one of its cheapest valuations in the last few years, with a forward P/E around 20 times. For a company with a recurring business model still projecting to grow revenue by 4%-6% in a slow year, the stock is attractively valued.
CHWY PE Ratio (Forward) data by YCharts.
Given its attractive valuation and the massive long-term opportunity it has in pet pharmacy, and health and wellness, now looks like a great time to buy Chewy stock.
