Chewy stock has increased nearly 100% in the past six months, and incredible performance.
The e-commerce company has outperformed the total subscription-based pet product industry, which rose 14.5%.
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Chewy Inc. CHWY has experienced an extraordinary six months, with its stock surging 95.5%. Once viewed as a niche player, Chewy has now firmed its position as a dominant force in the pet-focused e-commerce space, benefiting from the growing demand for convenient, subscription-based pet products. While investors celebrate the company’s success, a pressing question remains: Does Chewy have more room to run, or is a correction on the horizon?
The stock has comfortably outpaced the industry’s modest rise of 14.5%. Chewy’s unmatched scale and operational capabilities have also helped it outperform the Retail-Wholesale sector and the S&P 500 index, which posted respective gains of 14.7% and 14.4%.
CHWY Stock Past Six-Month Performance
Zacks Investment Research
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Chewy stock closed at $32.96 during yesterday’s trading session, sitting 15.7% below its 52-week high of $39.10, reached on June 27, 2024. CHWY also recently overtook the 50-day moving average. Let’s examine the factors behind this remarkable surge and brainstorm what potential investors’ next move should be in Chewy’s evolving story.
CHWY Trades Above 50 & 200-Day Moving Averages
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Decoding Tailwinds Behind CHWY’s Impressive Run
Chewy’s impressive upward trajectory can be attributed to a combination of strong financial performance, strategic investments and favorable market trends. The company’s expanding customer base, recurring revenue model and diversified service offerings, including veterinary clinics and pharmacy services, provide a solid foundation for continued growth. Chewy’s ability to improve margins, invest in technology and generate robust free cash flow adds significant investor confidence in its long-term prospects.
The company is steadily adapting to changing market dynamics while prioritizing customer loyalty making it a strong contender in the burgeoning pet care market.
A prime example of Chewy's focus on enhancing the customer experience is its innovative Autoship program, which saw a 5.8% year-over-year increase in sales during the second quarter of fiscal 2024, contributing a significant 78.4% of total net sales. This feature not only simplifies the purchasing process but also helps the company maintain a steady revenue stream, enabling it to tailor offerings based on preferences and needs.
Chewy's strategic expansion into veterinary care has shown promising results. The company opened two additional Chewy Vet Care clinics, bringing the total to six locations at the end of the second quarter. These clinics not only enhance customer loyalty but also act as strategic entry points for new customers, embedding them into the Chewy ecosystem. This initiative has a positive impact on Net Sales Per Active Customer (“NSPAC”), which reached a new record of $565 in the second quarter, reflecting year-over-year growth of 6.2%.
Chewy's Sponsored Ads business is ramping up nicely and is on track to reach the low end of its long-term target of 1% to 3% of net sales by the end of 2024. The growth in this area is driven by an expanding inventory, increased advertiser demand and improved customer engagement metrics. This revenue stream not only diversifies Chewy's income but also capitalizes on its large customer base.
Chewy has invested in improving its mobile app experience, resulting in a 13% year-over-year increase in unique customers placing orders through the app and a 15% rise in overall mobile app orders. The app’s redesign has enhanced user experience, leading to higher order volumes and improved customer retention.
What Could Hinder Chewy Stock's Momentum?
While Chewy continues to lead the pet e-commerce space, several factors could exert downward pressure on the stock. Slowing growth, potential customer acquisition saturation and rising cost pressures are critical areas that investors should monitor.
Chewy’s active customer count showed a modest sequential increase during the second quarter. Management highlighted that they expect the number of active customers to remain flat for 2024.
Chewy also operates in a highly price-sensitive market, where competitors quickly adjust their pricing strategies to attract customers. In addition, persistent inflationary pressures, especially in logistics, labor, and raw materials, could squeeze margins. The company’s advertising and marketing expenses, consuming 6% to 7% of net sales, may further strain profitability if revenue growth does not pick up.
Moreover, Chewy’s forward 12-month price-to-earnings ratio stands at 27.18, higher than the industry’s average of 25.36 and the S&P 500's 22.7. This premium valuation suggests that investors may be overpaying relative to the company’s expected earnings growth, and with a Value Score of C, Chewy may be overvalued. As a result, there could be a price correction on the horizon.
CHWY Stock Looks Overvalued
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Is CHWY Stock Still a Buy?
Chewy's impressive growth momentum reflects its strategic approach to capturing the expanding pet care market. Key initiatives such as the Autoship program, veterinary clinic expansion and an enhanced mobile app experience have strengthened customer loyalty, boosted recurring revenues and supported a rise in NSPAC.
However, as Chewy continues to innovate, challenges loom, including high operational costs and stiff competition from Petco Health and Wellness Company, Inc. WOOF, Central Garden & Pet Company CENT and BARK, Inc. BARK. Additionally, its premium valuation indicates that some growth expectations may already be factored in, potentially limiting near-term stock appreciation. Current stakeholders should consider whether the stock’s current price aligns with their investment timeline and risk tolerance, while new investors should wait for a more favorable entry point. CHWY currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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