Amazon and Chewy: Goldman Sachs Says Buy Both Stocks Amid ‘Resilient Business Models’

Consumer spending has long been known as the primary driver of the US economy. It bounced back strongly when the COVID pandemic receded, but headwinds in the form of persistent inflation and consequent higher interest rates have put a crimp in this economic engine.

Covering eCommerce for Goldman Sachs, analyst Alexandra Steiger advises caution for investors approaching US online retail stocks. She sees several reasons for holding back enthusiasm, including a change in consumer spending habits, from discretionary spending toward essential goods and services; competitive pressure from lower-cost Asian eCommerce platforms that will intensify this year; and an important shift in consumer preferences toward large-scale platforms at the expense of smaller sellers.

That doesn’t mean the sector lacks opportunities, however, and Steiger and her colleagues point out Amazon (NASDAQ:AMZN) and Chewy (NYSE:CHWY) as the brightest stars in the eCommerce constellation. Describing their overall position, Steiger writes, “Our Buy ratings offer exposure to companies that have i) more resilient business models with demand curves that we expect will be less elastic if the environment worsens (more exposure to essentials, subscriber ecosystem/recurring revenue) along with ii) a host of self-help margin levers. We believe that those two factors create a more favorable risk/reward relative to the rest of the sector over the next 12 months.”

Against this backdrop, we’ve used the data tools in the TipRanks platform to take a look under the hood at both Amazon and Chewy. Here’s what we found.

Amazon (AMZN)

First up is Amazon, one of the world’s most recognizable brands and the leader in the eCommerce/online retail field. With its $1.4-billion-plus in daily sales revenue, it dominates the landscape of online retail. As Stieger pointed out above, her outlook is based in part on ‘more resilient business models,’ and Amazon’s sheer size gives the company more than its share of resilience to weather any economic conditions.

Amazon built its eCommerce success by selling absolutely everything that anyone could ever want on one website and offering the fastest possible delivery times. That guarantee is backed up by a network of brick-and-mortar warehouses and delivery centers that span the nation and extend internationally, with some facilities totaling more than 1 million square feet of working space. The company has become ubiquitous online, and the Amazon.com site receives more than 2 billion visits every month, making it one of the most trafficked retail sites on the whole of the internet.

While eCommerce is the core business, Amazon has been branching out into multiple fields, building on its online expertise. The company’s subscription cloud computing service, AWS, has become widely popular and is one of Amazon’s revenue drivers. The company also offers online TV streaming, home automation, online gaming for adults and kids, the Kindle ebook reader, grocery delivery – the list is too long to put in its entirety here, but it would be difficult to get through a day without using some Amazon service.

For investors, perhaps the most relevant point is Amazon’s share overperformance in the last 12 months. The stock is up 59% in that period, easily outpacing the NASDAQ index’s 34% gain. The stock’s strong performance has come alongside solid revenues. Amazon reported $143.1 billion on the top line in 3Q23, for a 13% year-over-year increase. The revenue total included the $23.1 billion brought in by AWS, which was up 12% year-over-year, and the $12.06 billion in advertising services, which gained 25% from the prior year. Amazon’s quarterly revenue total was $1.54 billion better than had been expected.

Goldman Sachs’ esteemed 5-star analyst, Eric Sheridan, envisions Amazon as having a solid foundation for future performance, even in the face of unpredictable consumer spending patterns.

“We reiterate our positive view on Amazon into 2024. We think that the company is not only well positioned to navigate the current volatile consumer environment (given its scale, platform breadth and greater exposure to essentials and its resilient subscriber ecosystem) but that Amazon’s eCommerce margins are on a trajectory of scaling in the years ahead as supply chains normalize and wage inflation subsides and as the company continues to reap the benefits of prior logistics investments (including US regionalization, International scaling, etc.). The sharp improvement in North America operating margins seen in recent quarters increases our confidence in the trajectory of Amazon’s consolidated profitability in the periods ahead,” Sheridan opined.

These comments support Sheridan’s Buy rating on AMZN shares, while his $200 price target points toward a 31% upside potential for the next 12 months. (To watch Sheridan’s track record, click here)

The Goldman view is bullish, and it’s typical of the Wall Street take on Amazon. The stock has picked up an impressive 42 recent analyst reviews – and they are unanimously positive, for a Strong Buy consensus rating. With an average price target of $184.23 and a current trading price of $152.26, the outlook for Amazon suggests a 21% share price increase by the end of this year. (See Amazon stock forecast)

Chewy (CHWY)

The second stock we’ll look at is CHWY, the traded shares of Chewy.com. With its $8 billion market cap, this company is nowhere near as huge as Amazon – but it has still become a giant in online retail by developing a leading position in a large niche market. Chewy deals in pet supplies, offering customers wide ranges of goods and services, from food to toys to prescription veterinary medicines to pet insurance to soft and chewy treats – and these are available for every imaginable pet: cats and dogs, birds, reptiles, small mammals, and even non-pet animals and livestock found on farms.

This past December, Chewy announced a new service – the opening of its first brick-and-mortar veterinary clinic. The first clinic is opening this year in South Florida, with the service expanding into a chain throughout the year. The clinics will offer routine appointments, emergency care, and surgery for household pets, and customers can access the service through Chewy’s custom-built open platform.

The veterinary clinic service builds on Chewy’s existing online services. The company has long been able to connect pet owners with veterinarians and fill vet prescriptions online with both brand name and generic medications. This service adds a face-to-face dimension to what already exists online.

Founded in 2011, Chewy went public in 2019. The stock peaked in February of 2021 and has been dropping off since then. In the last 12 months, the stock has slipped some 57%.

Even while the stock has been falling, however, Chewy has been able to grow revenue. The company brought in $6.5 billion in 2020, $8.5 billion in 2021, and approximately $10 billion in 2022. The company’s $2.74 billion in quarterly revenue for 3Q23, the last reported, was up more than 8% year-over-year – although it missed expectations by $10 million. At the bottom line, Chewy’s non-GAAP earnings in 3Q23 came to 15 cents per diluted share. This was up 4 cents per share from the prior year and was 6 cents ahead of the forecast.

For the Goldman coverage on this stock, we’ll return to analyst Alexandra Steiger, who expounds on the company’s attractive risk-reward for investors.

“Looking ahead, we believe that shares offer a positive risk-reward skew as we expect that Chewy will be able to sustain ~HSD%+ topline growth (post FY2024) and steadily expand Adj. EBITDA margins, resulting in CHWY compounding profit dollars at a high rate from here, as prior investments in product initiatives are increasingly being monetized and as growth will mainly be driven by existing customers that already shop on the platform,” Steiger opined.

Getting to the outlook on the company, Steiger adds several reasons why she sees Chewy in a position for growth going forward: “We expect net sales to be driven by: a) rising cohort revenue trends as customers deepen their spend on the platform in the years following their acquisition (with year 2/3 NSPAC >2x higher vs. year 1), b) upside optionality from Chewy’s portfolio of strategic initiatives across health, international, private brands, Autoship penetration, and advertising & c) a return to more positive active customer growth as Chewy moves past the current challenging industry backdrop in the pet category.”

For Steiger, all of this supports a Buy rating on CHWY. Her price target, set at $36, implies a solid potential upside of 90% for this year. (To watch Steiger’s track record, click here)

Overall, CHWY stock has a Moderate Buy consensus rating based on 20 recent analyst reviews, breaking down to 12 Buys, 7 Holds, and 1 Sell. The stock’s current trading price is $18.87, and the average target price of $24.79 suggests a 31% gain on the one-year time horizon. (See Chewy stock forecast)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.