Some doubt about ownership Tough (NYSE: CHWY) stocks at this point are certainly understandable. According to the American Pet Products Association (APPA), pet ownership in the United States has fallen from 70% of households to 66% last year, which may have something to do with the cost of caring for our “furbabies.” A recent USA Today poll found that 91% of the nation’s dog owners – America’s favorite pet – have experienced some degree of financial stress caring for their puppies. In this vein, BNP Paribas packaged food analyst Max Gumport notes that the 11% increase in pet food prices since last year is responsible for the 3% decline in the country’s spending on premium pet food for the period of three months ending in July.
It all seems to point to trouble for online pet store Chewy. In fact, these headwinds may be a big part of why Chewy shares have fallen more than 80% from their early 2021 peak, hitting a new 52-week low (and nearing a record low) this week.
However, there are four reasons why this stock’s steep sell-off amid seemingly bad news is actually a great buying opportunity.
Four reasons why Chewy stock is a buy
1. Chewy is often the leader in low prices
Consumers may adjust to inflation by buying cheaper stuff… and less of it. However, it’s a dynamic that actually works in Chewy’s favor. See, Chewy’s prices are often the best prices, beating physical retail prices.
The key to these low prices is not what Chewy does, but rather what it doesn’t do. It does not operate increasingly expensive physical stores. It was built from the ground up to be – and only – an online pet store. So not only does it not pay high rent for retail space, but its distribution and fulfillment framework is optimized for online shopping.
2. It is also convenient
And that optimization is no small matter.
As is the case with most other consumer product categories, the world is increasingly shopping online. Market research firm Packaged Facts estimates that Americans spent $30.7 billion on their pets online last year, and Nielsen believes that figure will grow 20% to $36 billion this year, easily outpacing the growth of the overall pet market.
And yet there is still much more room for growth. Packaged Facts’ figures indicate that only 36% of pet supply sales in the United States currently occur online. By 2026, that share is expected to reach 45%.
3. Actually, people still love pets
Okay, the number of American households with a pet fell last year. However, don’t read too much into the setback. That 66% still meets long-term standards, and people who still have pets are still in love with them. According to Vericast’s 2023 Retail TrendWatch reports, three-quarters of the country’s pet parents see their critters more like a child than a pet. As such, they still plan to spend more on their furbabies in the near future. A separate poll from ValuePenguin found that just over three-quarters of pet owners in the United States would take on debt to save their animal’s life.
To this end, even though consumers may spend their money differently due to higher costs, APPA still estimates that total domestic spending on pets this year will reach $143.6 billion, up nearly 5% from last year.
4. The company’s continued growth proves reasons 1 through 3
After all, nothing speaks louder than results, right?
Despite the tough economic landscape, Chewy’s sales are expected to grow more than 11% this year and another 10% next year on its way to projected sales of more than $18.5 billion by 2027. More remarkable is the fact that this revenue growth is expected to push the company back into the black next year. The following year, earnings per share are expected to almost triple.
Data source: StockAnalysis.com. Chart by author.
That big return to profitability, followed by another big jump in earnings, will almost certainly be a bullish catalyst for the stock.
In fact, it could be a bullish catalyst before the numbers are even officially reported. Keep in mind that the stock market is typically forward-looking and prices shares based on the plausible future of the underlying company and not the past. Chewy’s future looks pretty bright, even if the stock’s recent performance hasn’t been that great.
The kicker: over 20% of shares in Chewy are currently being sold short, paving the way for a serious short squeeze. Stocks just need the right push. If and when they get it, the subsequent rally could take shape quickly.
Poised for a bullish reversal
So if Chewy is so great, why is its stock still falling?
There’s no need to dance around it; this stock has simply become too overheated during and because of the COVID-19 pandemic. Not only did people find joy in finding a new pet (the APPA reports that the number of pet owners rose from 67% to 70% in 2020), but some bored consumers turned to stock trading for entertainment. Many of these new investors found Chewy’s premise and fell in love with it. However, not enough of these buyers considered pesky details like valuation and plausible growth prospects. As reality seeped in, so did sales.
It’s also possible that Chewy stock went through the same pattern as many other newly minted stocks after their IPOs. That is, a huge post-IPO run-up, fueled by hype, followed by an equally large decline as the company’s early investors made their money back.
This pattern may have already run its full course with Chewy stock. Stocks are suspiciously back near the major lows of late 2019 and mid-2022, though not significantly below these lows. It could be a sign that investors are drawing a line in the sand, so to speak. If so, don’t be surprised if this stock is near or at a major bottom.
It can also be argued that Chewy shares have become the target of organized short-selling. The immediate impact is bearish, but sooner or later these sellers will have to buy back the shares to exit their trades. That’s bullish. It’s just a matter of when and at what price.
Yes, Chewy stock is still ridiculously expensive. The stock is valued at 180 times last year’s earnings per share of $0.12 and more than 130 times this year’s expected earnings of $0.16 per share. You can find much cheaper investment options.
However, this is not a valuation-based choice… at least not yet. It’s a growth stock story of a company with a history and prospects to support the stock’s potential recovery from here.
There is certainly a risk. Indeed, it is not the right choice for everyone’s wallet. However, the biggest risk here isn’t a lack of long-term upside potential. It’s just the risk of continued volatility. If you can stomach that for a while, Chewy is actually an attractive prospect for the risk-tolerant part of your investable capital.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions on and recommends Chewy. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.