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Is Chewy Stock About to Crash Back to Reality?

Chewy (NYSE:CHWY) reports its first-quarter 2019 earnings after the markets close on July 18. It’s the first report for Chewy stock as a public company. 

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The question for investors is whether the online pet retailer’s results are going to burst its bubble or send it higher still.

Read on and I’ll take a look at both scenarios.

It’s Going to Fall Flat

While the timing of Chewy’s IPO couldn’t have come at a better time with the markets flying high — both the Dow and S&P 500 have hit all-time records — the fact that Chewy stock gained 59% in its first day of trading and is up 50.4% through July 16, the markets are set for a cooling-off period. 

Maybe not a major correction of 10% or more, but a pause to consider what’s ahead for the U.S. economy. 

It’s no secret that the U.S. economy has been on one heck of a ride. It has expanded a record 121 consecutive months from July 2009, outlasting the previous economic boom between 1991 and 2001. 

Real-time indicators of GDP growth point to softer U.S. expansion. Although external factors such as tariffs and trade uncertainties have had a negative impact, they are not the only ones to blame,” stated Adrien Pichoud, chief economist and head of multi-asset at SYZ Asset Management. 

“The U.S. economy was bound to slow down this year, and it can hardly accelerate without another round of fiscal stimulus and a widening public deficit.”

For every cautious or negative view about the U.S. economy, it seems there is an equally enthusiastic endorsement. It’s hard to know where it will be by the end of 2019. 

Therefore, it’s probably better to consider Chewy itself to get a better read of where its stock is headed. 

Twelve analysts are covering Chewy stock with five buys and seven holds and an average target price of $36.70, providing 10% upside from the current target price. As for CHWY earnings, analysts expect it to lose seven cents in the upcoming quarter from $1.1 billion in revenue. 

In the latest fiscal year ended February 3, Chewy had sales of $3.5 billion and a $267.9 million loss with 20% gross margins. Over the past three fiscal years, Chewy has grown its revenues and gross margins impressively. On the downside, it has $727.2 million in cumulative losses over those three years. It is not cash flow-positive. 

My biggest concern for Chewy stock is the economy. The site was launched in 2011, a good three years after the recession. It hasn’t lived through an economic downturn. Losing money today, what will happen to it should the economy tank in the second half of 2019 and into 2020?

Up 50% from its IPO, it’s due for a breather.  

Chewy’s Going to Come Through

There’s no question that Chewy has captured a big piece of the online pet business. It’s a wonder Amazon (NASDAQ:AMZN) hasn’t made more of a dent in their market share. That speaks to the strength of its brand. 

“Chewy is well positioned as the leader in online pet, with multiple growth drivers. Chewy has about 50% share of the online pet market in the U.S., with top-line drivers supporting 20%+ growth through FY21 including the secular shift online, catalog expansion, Pharmacy (launched July 2018), international expansion, and a services marketplace,” stated J.P. Morgan analysts July 9.

Morgan initiated coverage on Chewy with an “overweight” rating.

There’s a lot to like about Chewy’s business. I guess that’s why Petsmart bought it in 2014 for $8.7 billion. Given Chewy’s current market cap of $13.1 billion, it’s looking like a brilliant decision. 

Chewy has approximately 11 million customers who can buy more than 45,000 products online, utilizing its Autoship subscription program to drive recurring revenue.

The market itself is vast with $73 billion up for grab each year and growing by 5% annually.

As a pet owner with multiple cats, I know how lucrative this market is. I don’t think there’s any doubt that Chewy’s operating in a fantastic niche whose demand from customers is not going away. 

The Bottom Line on Chewy Stock 

I could write a lot about why you should own Chewy stock. It’s got a great business that to date has kept Amazon at bay. 

I generally don’t like to recommend IPOs before they have traded for at least 12 months to see how the businesses and stocks shake out. Chewy is no different. 

However, if you don’t have the same problem, I’d consider buying some of its stock should it fall back into the $20s after earnings. 

Is that likely? Probably not. We’ll see on the 18th. 

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2019/07/is-chewy-stock-about-to-crash-back-to-reality/.

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