Chewy (CHWY +5.15%) stock has suffered in recent years, trading at a near 80% discount from its all-time high and almost 50% below its 52-week high.
Nonetheless, Chewy has become a profitable business, and it has become increasingly apparent that the selling in the consumer discretionary stock is overdone. That may have made Chewy stock a buy for two reasons.
Image source: The Motley Fool.
1. Chewy's continued sales growth
Investors may recall that Chewy stock was flying high during the pandemic. Like other pandemic stocks, it sold off heavily, and its attempted recovery from last year appeared to fizzle out.
NYSE: CHWY
Key Data Points
But Chewy never stopped growing its revenue over that time. In fiscal 2025 (ended Feb. 1), its $12.6 billion in net sales rose by 6% from year-ago levels. That led to a 125% spike in operating income.
Now, investors should note that a $241 million income tax benefit in 2024 skewed its net income higher that year, so the $223 million in net income in fiscal 2025 was down from $393 million in the previous year. Still, with its $562 million in free cash flow up by 24% year over year, Chewy is increasingly in control of its own destiny.
Moreover, investors should keep its competitive advantage in mind. It initially stood out by offering the low prices of a peer like Amazon, but with superior customer service.
Additionally, during the pandemic, it leveraged its place in the pet supply market by offering pharmaceuticals for pets (including compounded medications) and services such as pet telehealth. It has also begun to open vet clinics in various locales, creating a business line that can bolster sales levels in the coming years.
2. A low valuation
Furthermore, years of struggle have set Chewy up to become an inexpensive stock.
Admittedly, its trailing P/E ratio of 50 appears pricey since it is well above the S&P 500 average of 31. Still, investors should remember that the aforementioned income tax benefit skewed its net income.
Analysts forecast its net sales growth will accelerate by 9% in the upcoming fiscal year, and the same analysts expect a 28% increase in net income for the upcoming fiscal year and 22% in fiscal 2027. Consequently, its forward P/E ratio comes in at just 16, a low level considering the income growth that is well into the double digits.
Moving forward with Chewy stock
Amid its continuous improvement, Chewy stock remains a growth name with an increasingly compelling valuation.
Indeed, single-digit revenue growth tends not to attract premium valuation. Still, the dip in Chewy stock could be a gift, as it has delivered consistent net sales growth even as investors have turned on the stock. That has caused its forward P/E ratio to fall into the teens, a low level considering that net income growth is well above 20%.
As more customers turn to the company for pet supplies and vet services, investors are likely to eventually bid the stock higher. Hence, it may pay to begin adding Chewy shares before more investors take notice of this increasingly compelling value proposition.
