Shares of Chewy (NYSE:CHWY) are down 5.0% in the wake of a major downgrade. The downgrade comes from Wedbush who lowered the stock to Neutral from Outperform citing churn within the business.
Not only are the comps going to be tough on a YoY basis, but Wedbush analyst Seth Basham thinks net new growth will be weak as well. While churn is likely and weak growth a possibility it is the recurring revenue and total growth that we are interested in.
Basham is expecting the company to underperform for Q4 and next year, but we see something different. Chewy is at the crossroads of petcare and eCommerce, two sectors with strong secular tailwinds, and retail has been outperforming on all fronts. If anything, Chewy.com should produce solid results and favorable guidance.
The analyst community still likes Chewy even if Wedbush is turning sour. That said, Wedbush’s Neutral rating is the first activity in 3 months and comes with a lowered price target as well. Their target is down $20 to $70 and the new low, but even that implies about 16% upside from the current price action.
The Marketbeat.com consensus estimate is closer to $98 and it implies about 66% of upside which is more in line with our view. The high price target of $133 was set way back in June by Bank of America and it may yet be reachable.
The key takeaway for this company and market, however, is that it has been picking up analysts over the past quarter. The company picked up 4 new analysts ratings putting the total at 19 current ratings and a record high. Market sentiment may be mixed, the consensus rating is a weak Buy, but the market is there and the outlook is positive.
This Is What The Analysts Expect For Chewy.com
Analyst's expectations for Chewy.com are not unreasonable and even leave the door open for outperformance. The crew is expecting revenue of $2.21 billion or up 3.2% sequentially and 24% on a YOY basis. The revenue will be a record and, looking at things on a sequential basis, the 3.2% is growth is below average.
The only bad news is that on a YoY basis the 24% is another slowdown but even that is not a worry because the slowdown is more a function of large numbers than slowing growth. Over the past few quarters growth has slowly decelerated from 31.7% to 26.8% to the now expected 24% and there is an upside risk in the outlook.
We are going into the strongest growth quarter of the company’s year with notable strength across the retail sector. Last two years the company reported average growth of 11.9% which is well above the analyst’s consensus and more in line with our expectations.
Technical Outlook
Shares of Chewy.com are down 50% from their highs set early this year, but this is due to short-selling. The short interest in the stock has been running at 20% for several months and setting it up for a major rally and possible short-squeeze.
The price action is now below the established trend line and looking overextended with signs of support in the indicators. Both the MACD and stochastics are forming divergences from the price action that suggests growing strength and a possible swing in momentum if not a reversal and return to trend.
Assuming the Q3 report is as we expect, we see support confirming at the trend line and for this stock to begin moving higher shortly after that.
