Investors looking to invest in beaten-down stocks can consider online pet company Chewy Inc. The ongoing volatility in the equity markets provides investors an opportunity to buy growth stocks at a lower valuation. Chewy stock is down 41% from all-time highs and here’s why it is a top stock to consider right now.
Chewy stock operates an e-commerce business in the United States. It provides pet food and treats, pet supplies, medications, and other health products. Chewy also offers pet services for dogs, cats, fish, birds, horses, and reptiles. It has more than 70,000 products and has partnered with 2,500 brands in the last decade.
An online pet retailer, Chewy, similar to other digital platforms, has seen a massive increase in demand amid COVID-19, due to economic lockdowns and closure of brick and mortar stores. This allowed the company to more than triple sales from $2.1 billion in 2018 to $7.1 billion in fiscal 2021 that ended in March. Chewy’s top-line growth was driven by several factors that include the shift in consumer shopping trends, an expanding selection of products, and the addition of new customers.
This has allowed Chewy to expand profit margins as well. Its gross margin has risen from 16.6% in 2016 to 25.5% in 2021. An e-commerce company like Chewy should continue to benefit from rising margins if order sizes continue to increase. As they deliver a package with a higher number of items, shipping costs per order value is expected to decline.
The pet food industry is relatively immune to economic downturns as pet owners are unlikely to reduce spending even if income levels fall off a cliff.
While the S&P 500 Index has gained close to 20% year to date, Chewy stock has fallen by 18.9% in 2021. This suggests the stock is trading at a forward price to sales multiple of just over 3x given Chewy’s top-line is expected to expand by 26.7% to $9.05 billion in fiscal 2022.
Further, analysts also expect sales to rise by 20.3% to $10.9 billion in 2023. The solid growth in the top-line will also help Chewy to improve its net margins and report earnings of $0.31 per share in fiscal 2023, compared to a loss of $0.23 per share in 2021.
While CHWY is attractively valued, the company managed to grow its active customer base by 21% year over year at the end of the June quarter to 20 million. Around 70% of total sales were through its Autoship program where orders are recurring in nature, making this business significantly profitable. The orders planned in advance can be bundled together reducing shipping and delivery costs as well as improving supply chain efficiencies. Chewy will soon launch its own products which will help it improve profit margins further.
We can see that Chewy might be the perfect contrarian bet right now given its rising base of customers, improving profit margins, a secular shift towards online shopping, and enviable valuation. Wall Street echoes my sentiment and expects CHWY stock to rise by at least 30% in the next 12-months.