Shares of Chewy (NYSE: CHWY) jumped about 18% in pre-market trading on July 1. Folks were responding to recent activity from the highly influential retail stock trader Keith Gill, aka Roaring Kitty.
On the afternoon of June 27, Gill posted a generic dog illustration on his preferred social media platform. Chewy stock jumped in response to the cryptic post because many of Gill's followers know that Chewy's founder and former CEO, Ryan Cohen, is also chairman of GameStop 's board of directors and its CEO.
Chewy's stock rally fizzled out on Friday, June 28, only to resume in force on the morning of Monday, July 1, after Gill disclosed to the Securities and Exchange Commission (SEC) a 6.6% stake in the online pet product retailer.
Is Chewy a stock to buy, sell, or hold now that the internet's most popular trader has a significant stake? Let's explore our options.
Reasons to buy Chewy stock
At the end of March, Chewy had 19.98 million customers. This is enough to give the niche retailer significant negotiating power with Mars, Nestle , and other major pet product manufacturers.
For example, a 16-pound bag of my cats' favorite dry food costs a few dollars less at Chewy than it does at Walmart if I get it automatically shipped. Auto-ship orders make up 77.6% of Chewy's net sales, and they're extra sticky because members with auto-ship orders are eligible for free chats with licensed veterinarians.
Despite selling pet food at a lower price than America's largest retailer, Chewy is reporting a profit. During the 12 months ended April 28, net income reached $84 million, which was 65.7% more than it reported in the previous-year period.
A reason to sell Chewy stock
Negotiating power that comes with a large customer base is an important advantage, but it isn't a very strong one. Amazon keeps its Prime membership numbers under wraps, but it's estimated at roughly 75% of all U.S. consumers.
Walmart isn't competing for my cat food budget, but Amazon is. At the moment, automatic shipments of my cats' favorite dry food from Amazon cost the exact same amount as auto shipments from Chewy. Amazon doesn't offer free chats with veterinarians, but it has the resources to do so if it chooses.
All this means competition from Amazon is making it hard for Chewy to retain customers. At the end of its fiscal first quarter, there were 2.1% fewer active customers than the company reported a year earlier.
A reason to hold Chewy stock
The Roaring Kitty-induced stock bump that began in the pre-market session on July 1 didn't survive the opening bell. By 10:45 a.m. ET, the stock was 4% lower than it was at the end of the previous session.
At the moment, it doesn't look like Chewy is going to become the next big meme stock , but it still could.
At recent prices, you can buy Chewy for about 27.6 times forward-looking earnings expectations. That's not an unreasonable valuation for a company that recently reported trailing earnings that rose by nearly two-thirds over the past 12 months.
The best move for most investors
If Gill's disclosure had driven Chewy's stock price up to an unreasonable multiple of forward-looking earnings, I'd be shouting "sell," but that didn't happen.
Buying up Chewy stock while the company is losing customers to fierce competition with Amazon is probably a bad idea, despite Gill's endorsement.
Generally speaking, doing nothing is usually the best decision an investor can make, and that's the case with Chewy right now. Holding the stock if it's already in your portfolio looks like the smartest move investors can make.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Cory Renauer has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Chewy, and Walmart. The Motley Fool recommends Nestlé. The Motley Fool has a disclosure policy .
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