Though it has a silly name for a publicly traded company, Chewy (NYSE:CHWY) has been quite the tasty treat as investors go, both the big and small dogs. And why not? Chewy stock has an overarching trajectory since its June 2019 debut that’s been nothing but up, up, up—or, as I might say to my corgi puppy: “Jump, jump, jump!”
Speaking of overarching, the big question in such cases such as this is not so much specific as general: How long can a stock like this keep it up? While it’s a fair query, happy investors are too often anxious as well. This is why the well-documented flip side to irrational exuberance is irrational anxiety.
Let us, then, get out of our heads and under the hood of this Florida-based company and see if it really has the makings of best in show, or is just a mutt in purebred’s clothing.
PetSmart’s Potentially Smart Move
There’s no denying one financial: Chewy was acquired by PetSmart in 2017 for $3 billion, an eye-popping deal that turned the web-based business into PetSmart’s online retailer. CHWY’s June 2019 initial public offering was wildly successful, and the first-day closing price of $35 per share was 59% above its IPO price of $22.
From the $35 mark, Chewy stock has since risen 48% to about $52 per share. Not at all bad for a company that went into business in 2011 and today boasts a market capitalization of $21.3 billon. Perhaps it should bother me that the company is still losing money: it reported a second-quarter net loss of $32.8 million in its latest earnings report issued on Sept. 10.
But it seems such bedrock statistics strike so many of today’s hungry investors as mere folderol. Silly me. They might instead point to how Chewy’s net sales of $1.7 billion grew 47% year-over-year. That’s definitely a number to be reckoned with but as analogies go, what looks like a show dog on the outside is still an immature puppy on the inside. And puppies, while cute, and irresistible, can chew up your portfolio if they don’t mature, pun intended.
That noted, Chewy makes its pet products home on the internet. And that’s where things get interesting. Very interesting.
E-Commerce Meets the Coronavirus
As the novel coronavirus has forced an entire nation of 331 million people to limit contact with the outside world, consumerism via the web has become a fact of life and a boon that won’t go away anytime soon for public companies. The 10 zillion-ton gorilla known as Amazon (NASDAQ:AMZN) has seen its stock rise 54% in 2020 alone. It trades at a nosebleed level above $2,900 a share. Five years ago, it traded at $540. Too bad you can’t buy it at a discount on, say, Amazon.
Covid-19 has likely played a major role in the year-over-year sales jump Chewy just reported. Speculation is dangerous of course but extrapolation is not. The odds are overwhelming that 2020 will come and go without a proven coronavirus vaccine. Combine that with the coming winter and consumers will find themselves doubly driven to let someone else deliver the pet food and kitty toys instead of leaving the house.
And if by some slight of Dr. Fauci’s hand a vaccine were to appear tomorrow, it would hardly undo the new habits the buying public has learned. Once you’ve entered your payment information into online sites such as Chewy and experience your first convenient drop off, you’re not about to reconsider everything just because you don’t have to wear a mask anymore.
Chew on This: Chewy Stock Is Ready to Rock
Let recall that Amazon was unprofitable for a long, long time before the wisdom of the consumer marketplace and history itself finally won out. To be sure, there was no way of knowing when it went public in 1997 that Amazon be around for even a few years. Remember when the House of Bezos only sold – gasp! — books? We were still a decade away from the first iPhone at that point.
Yet the march of change is the march of change. Chewy does not sell its products out of a car trunk or a storefront, even if PetSmart still depends on retail locations. When online outfits like a Chewy fail, it’s often because they’re the creation of a struggling brick-and-mortar retailer perplexed over how to get internet savvy. That is hardly the case here.
Yes, I’m bothered by the lack of profit; call me the cranky value investor acolyte that I am. But as much as any company that gained a foothold in e-commerce and managed to stay there, Chewy has nine years of success to build on. Online sales, at the very least, are tilting the right way.
Speaking of sales, maybe it’s time to buy some Chewy stock. Or, if you prefer the parlance of canines, “Fetch, boy!”
On the date of publication, Lou Carlozo did not have (either directly or indirectly) any positions in the securities mentioned in this article.
