Chewy: It Is Diversified Growth In A Single Stock
What many American’s still don’t realize is that the pandemic accelerated some trends that were already in place. Among them a shift to digital, a reliance on eCommerce, a stay-at-home/play-at-home attitude, higher levels of care for our pets, and pet adoption. Each of these trends is fueling a growth industry and Chewy (NYSE:CHWY) is at the nexus of them all. And that’s why it is still a great buy for growth investors if you buy at the right time. Based on the trends that are in place and the outlook for 2021 the recent pullback in share price looks like a great time to buy.
Chewy’s Great Quarter Wasn’t Good Enough
Chewy.com reported a fantastic calendar 3rd quarter but it suffered the same fate as some other great companies this past earnings cycle. The expectations were so high and had built to such a crescendo that the 44% increase in YOY revenue wasn’t enough to keep the market happy despite beating the consensus estimate. The news sent shares rocketing higher but they quickly peaked out and rolled into a selloff that has yet to run its course.
Looking forward, the company is expecting revenue to continue growing at a pace above the consensus. While the average basket size fell slightly during the quarter the number of active users came in well above expectation and more than offset the difference. More importantly, recurring revenue is tracking over 70% of the net proving the company is retaining high-levels of new traffic. In terms of guidance, the company is expecting revenue to grow 14% sequentially in the 4th quarter and maintain the 44% YOY pace it set in the 3rd.
The Analysts Love Chewy.com
The analysts have been bullish on Chewy.com from the get-go and no wonder, the company is situated better than any company I can think of and firing on all cylinders. While the average rating hasn’t budged in the last couple of months the consensus price target has. The consensus price target is up 27% in the last 90 days and 15% in the last 30 and is still lagging the price action. The current consensus of $75.41 implies 14% downside but doesn’t reflect the most recent resting accurately. The three most recent upgrade/target hikes have a consensus near $111.50 or about 26% upside.
Needham says:
“We see CHWY driving strong growth through: mid-teen% new customer growth, increasing net sales per customer as newer cohorts ramp, and margin expansion through favorable sales mix changes, leverage from strong sales growth, and improving efficiencies …”
The Technical Outlook: Chewy.com At Support But Wait To Buy
Shares of Chewy.com are in an obvious uptrend and pulling back to support. The move lower is aided by a high short-interest that is tracking above 21%. Price action may continue to drift lower in the near-term but I suspect the shorts will begin to cover soon. The recently approved stimulus checks are already making their way into America’s bank accounts and that is going to drive revenue and growth for all the pandemic-winners including Chewy.com. The risk for investors now is that support at the short-term EMA won’t hold and the stock will make another leg lower.
Longer-term, this company is growing at a high-double-digit rate that is not expected to slacken. If anything, earnings growth will continue to accelerate while revenue growth steadies to a 20% CAGR over the next few years. With that in mind, the lower Chewy.com’s share prices fall the more attractive they look. If the shorts cover at the $85 level, great, if they wait until the price action hits $80 or $70 that is even better. In either case, investors should wait for the short-covering to start before getting into this stock. The next earnings report is scheduled for early February
