Chewy (NYSE:CHWY) caught a bid on Monday, if briefly. At one point, Chewy stock was up over 8%. A market-wide fade undercut the gains, but CHWY still closed positive on a red day for the major indices.
The catalyst appears to be rumors about the company’s sales and a potential strategic partner. As always, those rumors might be true, especially as both make some sense.
But the good news when it comes to Chewy stock is that the rumors don’t have to be true. This isn’t a stock that is a buy because of short-term factors. It’s the long-term case that’s truly attractive. Of course, a near-term catalyst or two wouldn’t hurt, either.
Rumors Are Spreading
According to Seeking Alpha, it was trader chatter that drove Chewy stock higher in early trading. Channel checks showed strong sales. And a rumor went around that Walmart (NYSE:WMT) was set to take a stake in the company.
Again, neither fact is confirmed. But both make some sense.
After all, Chewy is coming off an impressive fiscal first-quarter report. Revenue increased 46% year-over-year, and handily beat analyst expectations. And that growth came with the novel coronavirus only boosting the last half of the quarter, and providing only about six points’ worth of growth according to the first-quarter conference call.
But the pandemic’s impact wasn’t limited only to Q1 revenue. Rather, stay-at-home orders led pet owners to choose Chewy for the first time. Chewy added over 1.5 million customers in the quarter, more than double the figure in the quarter before.
Those customers likely aren’t going anywhere. And so it makes sense that Q2 sales would be strong as well.
As far as the Walmart deal, that too makes some sense. Walmart has been spending aggressively to build out its omnichannel model. In fact, its acquisition of Jet.com in 2016 was the largest e-commerce acquisition ever — until PetSmart bought Chewy the following year.
There isn’t a pet-focused business Walmart can buy at this point. Chewy simply is too far ahead. But a stake in Chewy could lead to a closer integration between the two companies. Chewy could benefit from Walmart’s massive customer base and its distribution capabilities. Such a deal truly would be a win-win.
Chewy Stock Is a Buy Anyway
But here’s the good news: Chewy stock doesn’t need Walmart to be a buy here.
Again, Chewy is dominating its space. Walmart and Amazon (NASDAQ:AMZN) have some market share, but Chewy is gobbling up customers at a truly impressive clip. This is a company that generated $200 million in sales in 2014. It’s headed toward $7 billion this year.
And like Amazon, Chewy has the opportunity to branch out from its core business. Chewy Pharmacy is growing nicely. Chewy’s prescription management platform for veterinary offices is potentially the first step toward a broader focus on services.
International expansion is another opportunity, though Chewy would face its counterpart Zooplus (OTCMKTS:ZLPSF) in Europe.
On top of those broad tailwinds, the pandemic should be a plus for the company. Pet ownership is going to rise: Shelters have been emptied across the country. The rise of working from home will allow more people to own more animals going forward.
This is one of the better growth stories out there. But, oddly, investors of late haven’t treated it as such.
The Bottom Line: Why the Brief Pause in Chewy?
Despite the growth potential, Chewy stock has stalled out around $50 since the beginning of last month. Investors even shrugged at the early June earnings beat.
To be honest, I’m not completely sure why that is. Elsewhere in the market, e-commerce stocks have soared. Amazon cleared $3,000, and Amazon Web Services isn’t the only reason why. eBay (NASDAQ:EBAY) keeps climbing. The same is true of Wayfair (NYSE:W). Even long-struggling Overstock.com (NASDAQ:OSTK) has been a big winner.
I’d expect CHWY will follow that trajectory higher at some point. Perhaps this week’s rumors will be the catalyst. Perhaps second-quarter earnings will get investor attention.
Whatever the cause, Chewy stock seems likely to rise from here. The sideways trading of late is just a brief pause. Bullish rumors on Monday weren’t enough to drive a breakout, but it won’t be long before something does.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.
