Chewy (CHWY +0.47%) stock has faced significant challenges in recent years, currently trading at nearly an 80% discount from its all-time high and almost 50% lower than its 52-week high, which raises concerns among potential investors.
However, despite these setbacks, Chewy has transformed into a profitable enterprise, and it has become increasingly clear that the recent sell-off in this consumer discretionary stock may be overblown. This situation may present a favorable buying opportunity for Chewy stock for two key reasons.
Image source: The Motley Fool.
1. Analyze Chewy’s Consistent Sales Growth
Investors may remember that Chewy stock soared during the pandemic, benefiting from increased pet ownership and spending. However, similar to other pandemic stocks, it experienced a sharp decline and struggled to regain its previous heights in the subsequent recovery attempts.
Today’s Change
(0.47%) $0.12
Current Price
$25.54
Key Data Points
Market Cap
$11B
Day’s Range
$25.19 – $26.06
52wk Range
$22.74 – $48.62
Volume
5.9M
Avg Vol
8.3M
Gross Margin
28.77%
Nevertheless, Chewy has consistently increased its revenue throughout this period. In fiscal 2025 (ending February 1), Chewy reported net sales of $12.6 billion, reflecting a 6% increase from the previous year’s figures. This growth contributed to a remarkable 125% surge in operating income, showcasing the company’s resilience and ability to adapt to market fluctuations.
It is essential for investors to be aware that a $241 million income tax benefit in 2024 significantly impacted its net income for that year, resulting in $223 million of net income in fiscal 2025, which is a decline from the $393 million reported in the prior year. Despite this drop, the company achieved $562 million in free cash flow, representing a 24% year-over-year increase, which gives Chewy more control over its future.
Additionally, investors should acknowledge Chewy’s competitive advantage in the market. Initially, it gained traction by offering prices comparable to Amazon, but with a commitment to superior customer service. This focus on customer satisfaction has been a hallmark of Chewy’s strategy and has helped it retain a loyal customer base.
Moreover, during the pandemic, Chewy capitalized on its position in the pet supply industry by introducing a range of pharmaceuticals for pets, including compounded medications, and services such as pet telehealth. The company is also expanding its footprint by opening veterinary clinics in various locations, which not only enhances its service offerings but also has the potential to boost sales in the future.
2. Explore Chewy’s Attractive Valuation Metrics
Moreover, years of fluctuating performance have positioned Chewy as an attractive stock for value investors seeking bargains.
While its trailing P/E ratio of 50 may seem elevated, especially when compared to the S&P 500 average of 31, investors must keep in mind that the previously mentioned income tax benefit has distorted its net income figures.
Looking ahead, analysts predict that Chewy’s net sales growth will accelerate to 9% in the next fiscal year, accompanied by an expected 28% rise in net income for the upcoming fiscal year and a 22% increase by fiscal 2027. As a result, Chewy’s forward P/E ratio is a much more reasonable 16, particularly when considering the projected income growth that is expected to remain in the double digits.
3. Strategies for Investing in Chewy Stock
As Chewy continues to show signs of improvement, the stock remains a viable growth opportunity with an increasingly appealing valuation.
Indeed, while single-digit revenue growth typically does not attract premium valuations, the recent decline in Chewy stock could represent a unique opportunity. The company has consistently delivered net sales growth, even as market sentiment has turned sour, leading to a decrease in its forward P/E ratio to the teens. This level appears attractive, especially considering net income growth projections exceed 20%.
As more consumers turn to Chewy for their pet supply and veterinary service needs, there is a strong likelihood that investors will eventually recognize the stock’s value, leading to upward price movement. Therefore, it may be wise for investors to start accumulating Chewy shares before the wider market catches on to this increasingly compelling investment opportunity.
Ethan Jameson is a passionate author and financial blogger at Oxford Wise Finance, where he explores a variety of general topics related to finance and personal development. With a keen interest in helping readers navigate the complexities of financial literacy, Ethan combines insightful analysis with practical advice to empower individuals in their financial journeys. He believes in making finance accessible to all and enjoys sharing knowledge that fosters informed decision-making.
