When it comes to assessing anything related to the consumer economy, it’s difficult to ignore the impact of inflation. However, a bright spot in this troubling backdrop may be online pet products retailer Chewy (NYSE:CHWY). Its latest financial disclosure appears to confirm what we already know: Americans love their pets. Even better, they’re willing to open their wallets for them. That being the case, I’m following the narrative to the logical conclusion. I’m bullish on CHWY stock.
CHWY Stock Drives Higher on Q1 Earnings
Recently, Chewy posted its results for the first quarter of 2024. As TipRanks contributor David Moadel pointed out, the company’s revenue expanded by 3.1% on a year-over-year basis to hit $2.88 billion. This figure beat the consensus view of $2.85 billion. On the bottom line, the e-commerce specialist reported adjusted earnings per share of 31 cents. That was up 55% from the year-ago quarter and handily beat the consensus target of 20 cents.
Interestingly, Chewy had a similar performance for its Q4-2023 earnings print. Back in March this year, management disclosed revenue of $2.83 billion, representing an improvement of 4.2% year-over-year. This figure beat the consensus target of $2.79 billion. It also reported EPS of seven cents, exceeding Wall Street experts’ consensus view of a loss of four cents. On an adjusted basis, EPS rose to 18 cents, also beating analysts’ estimates, this time by nine cents.
However, there was a big difference between the two earnings reports in terms of market response. For the former, CHWY stock dipped, while for the latter, shares went on a blistering run.
In the Q4 report, management anticipated that Q1 revenue would land between $2.84 billion and $2.86 billion. As stated earlier, the actual figure landed at $2.88 billion. Of course, that’s fundamentally significant for CHWY stock.
Obviously, it’s always a good time when companies exceed expectations. It’s even better when previously broadcasted anxieties turn out to be for naught. However, what really sent CHWY stock up 28% last week was the underlying message these results conveyed about consumer behavior.
Yes, the consumer is hurting. As TipRanks reported several times, credit card debt is rising, as are delinquencies. However, Chewy told investors with hard data that despite inflation, pet-owning households – which number around 87 million – are committing to serving their furry friends. As a pet products enterprise, it doesn’t get much better than that.
The Numbers Work Out for Chewy
Even with the strong fundamentals, there’s another reason to be bullish on CHWY stock: math. Since Chewy continues to perform well despite the enormous headwinds of inflation and high borrowing costs, its forward projections feature more credibility.
Let’s consider the industry as a whole. According to research outlet Mordor Intelligence, the U.S. pet care and services market may reach a valuation of $12.21 billion by the end of this year. Further, by 2029, the sector’s revenue could expand to $14.51 billion. That comes out to a compound annual growth rate (CAGR) of 3.51%.
While it’s a different backdrop, Grand View Research points out that the global pet care market reached a valuation of $150.67 billion in 2021. By 2030, the sector could be worth $236.16 billion. If so, that would represent a CAGR of 5.1%.
Morgan Stanley (NYSE:MS) provides the most optimistic view. The banking giant’s research arm notes that since the pandemic began, U.S. households acquired five million more pets. Due in part to this dynamic, it estimates an 8% annual growth rate in the pet industry by 2030.
Now, let’s look at projections for Chewy. Last year, the company posted revenue of $11.15 billion. By 2028, the consensus view among analysts states that sales could hit $15.18 billion. If so, that would translate to a CAGR of 6.37%. That’s above the domestic rate cited by Mordor Intelligence and also above the global rate cited by Grand View Research.
That’s a good baseline in terms of a bullish thesis for CHWY stock. However, because Q1’s earnings report came in better than expected, it’s not entirely unreasonable to believe that the most optimistic projections could materialize.
If so, 2028 revenue could reach $16.9 billion. Under this framework, Chewy’s top line would enjoy a CAGR of 8.67%. That’s above Morgan Stanley’s high-side view, making CHWY stock very compelling.
It’s Not Cheap, But That’s Not the Whole Story
Every investment idea has its pros and cons. One of the cons of CHWY stock is that it’s not cheap. I’m not going to argue against that point. Right now, shares trade at 0.82X trailing-year revenue. Depending on how you want to classify Chewy, perspectives may change. However, the specialty retail sector features a sales multiple of 0.87x.
You’re not getting blown out of the water with an extremely rich premium. However, as stated earlier, it’s not cheap.
Still, that’s not the whole story. As management demonstrated, consumers are opening their wallets for e-commerce-sourced pet products. They could choose cheaper alternatives, but they’re not. That’s an excellent sign and well worth the sales multiple you’d be paying.
Is CHWY Stock a Buy, According to Analysts?
Turning to Wall Street, CHWY stock has a Moderate Buy consensus rating based on 13 Buys, eight Holds, and one Sell rating. The average CHWY stock price target is $24.88, implying 12.6% upside potential.
The Takeaway: Consumer Commitment Bolsters CHWY Stock
Why should investors consider the bullish case of CHWY stock? To summarize, despite the pressures of inflation, consumers are committed to caring for their pets. Not only that, but they’re specifically spending money at Chewy, an e-commerce specialist. Given its proven resilience, the forward projections are credible, which logically means it has a chance to grow faster than the underlying market. In turn, it’s a valuation premium you can trust, in my view.
