Online pet supply retailer Chewy (NYSE:CHWY) has been a pandemic success story. With house-bound consumers adopting pets and online shopping getting a huge boost, CHWY stock posted growth of nearly 215% in 2020.
However, this year has been a very different story. Shares closed at an all-time high of $118.69 in February, then tumbled. Even the company’s first-ever quarterly profit hasn’t been enough to stop the slide. And right now, you can pick up Chewy stock for around $81 per share.
That sounds like an opportunity. But is it possible that CHWY stock will continue to slump? There are certainly risks with this e-commerce company, but Chewy also has a lot going for it. There’s a decent case to be made for a recovery and long-term growth ahead. In fact, Chewy made it on my list of “8 Stocks to Buy for March,” despite its poor showing that month.
A Strong Fourth Quarter and Full Year 2020
At the end of March, Chewy reported its Q4 and full-year 2020 earnings. The results were summed up by the company’s CEO Sumit Singh:
“…we grew net sales by 47 percent year over year, increased our customer base by 43 percent year over year, delivered our first full year of positive adjusted EBITDA, and generated the company’s first quarter of positive net income in the fourth quarter of 2020.”
CHWY stock popped on the results, but quickly gave back the gain.
Analyst Downgrade of CHWY Stock
In January, CHWY stock — which was trading at around $107 at the time — was on the receiving end of a downgrade from UBS analyst Eric Sheridan. Citing concerns that growth because of the pandemic might be causing “bull market optimism,” Sheridan downgraded CHWY to “Sell” from “Neutral” with a $75 price target.
That said, the investment analysts being tracked by the Wall Street Journal who offer Chewy coverage are far more optimistic. They have CHWY stock rated as “Overweight” with an average $102.54 price target. That represents a very nice 26% upside.
Long-Term Trends Working in Chewy’s Favor
Overall, Chewy’s entire business is based on two long-term trends. And both are working in the company’s favor.
First, people spend a lot of money on their pets. That spending is increasing, and it’s resistant to outside factors like recessions. When they’re worried about losing their job, people may stop buying cars or TVs, but they don’t stop spending on their pets. In fact, the pet food industry alone is projected to be worth $88.5 billion by 2023, with North America accounting for the lion’s share of that spending. And that number doesn’t include other pet supplies — just food.
The second trend is the increasing popularity of e-commerce. The pandemic has helped to accelerate adoption of online shopping. With bulk supplies like pet food, online shopping (with delivery to your door) has even greater appeal.
Bottom Line on CHWY Stock
There are risks that even the current valuation is taking future growth into account. Bigger e-commerce companies are undoubtedly watching Chewy’s success. They may decide that pet supplies is a market they should pay more attention to. Pet supply chains that are currently focused primarily on their brick and mortar operations could ramp up their online presence.
However, none of these scenarios is a certainty, or guaranteed to derail Chewy’s growth should they come to pass. What is certain though is that Chewy is riding two waves that show no signs of cresting: the growth of online shopping and spending on pets.
Collectively, the bottom line on CHWY stock is this: It’s a “B” stock in Portfolio Grader, not an “A.” It’s been moving the wrong direction in 2021, especially since the start of March. There’s nothing to say the slide won’t continue.
However, the company has a lot of things going for it. It’s piling on users, revenue is up, and it even turned a profit last quarter. And the current dip offers an opportunity to buy shares at late 2019 prices. That’s an opportunity that many investors will take, and I suspect they’ll do well.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
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