Shares of Chewy (NYSE:CHWY) have remained flat despite a stellar earnings report. The better-than-expected results allowed the company to post adjusted EBITDA profits for the first time. But since June 9, Chewy stock actually declined about 10% before a recent rally.
More importantly, the stock is over 40% higher than when Chewy initiated its initial public offering (IPO) in 2019. This has to be comforting to investors who are losing their appetite for IPOs.
During the conference call following the release of earnings, Chewy announced that it was projecting revenue that would roughly equal the $1.62 billion it brought in during the first quarter. While this would represent approximately 40% year-over-year (YoY) growth, it would be flat from the prior quarter.
That would be a great accomplishment, given the wider market carnage. But the question on investors’ minds is, has the pandemic brought about a true change in consumer habits?
I believe it has because the pandemic only jumpstarted a trend that was already well under way.
Chewy is What Pets.com Wanted to Be
The dot-com revolution taught investors many things. One of those is that the financials matter more than the idea. But that’s not to say the ideas introduced during those exciting days were completely without merit.
Pets.com tends to be the poster child for the tech wreck. But it was just ahead of its time. At the time, e-commerce was a concept that lacked the infrastructure and consumer acceptance that it has today. People were still becoming comfortable with online banking and using debit cards instead of writing checks or cash.
For our Generation X and older readers, this is just a redundant history lesson. But it’s important for younger investors to understand that just 20 years ago, it was a very different world. Online shopping for a great many consumers was akin to witchcraft. Not only was there real concern over the safety of transactions, there was a convenience barrier that had to be overcome.
For many investors, the question was, why would we ever do that?
The Digital Everything Economy is Alive and Well
But all that has changed. The 2019 holiday shopping season saw online shopping surpass general merchandise sales for the first time ever. In addition, there was a dramatic uptick in consumers shopping with their mobile phones.
These trends increased as a percentage during the lockdown period. Consumers were staying home, but still needed to shop. And that meant that many of the stragglers to e-commerce finally gave it a whirl. That macrotrend has propelled Chewy stock to climb over 100% since March.
Americans Love Their Pets
According to Statista, Americans may spend up to $99 billion on pet-related expenses in 2020. This doesn’t surprise me; I’m a pet owner, and do my best to make sure that she is well taken care of.
But I can’t hold a candle to the rabid devotion that many pet owners display for their pets. This isn’t exactly new. But at a time when many Americans were sheltered in place, pets have played an important role in American’s physical and emotional health.
I knew that Chewy fit into this trend towards pet food and supplies being purchased online, but I wasn’t aware of how well they fit into it until I read an article by my colleague Luke Lango, who reported that Chewy had grown to approximately 50% market share in 2019.
What’s Next For Chewy Stock?
Chewy has a nice moat and is successfully competing with Amazon (NASDAQ:AMZN) on both price and convenience. But that alone isn’t enough to justify the price tag.
Investors will be paying close attention to Chewy’s next earnings report, which is scheduled for September, but they need to look longer term. I believe that the second quarter will still show the halo effect from shelter in place orders.
It will be later this year when we should start seeing if Chewy truly has traction. If it does, then Chewy stock will justify its current price.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
