Roaring Kitty Owns $217 Million of Chewy Stock. Should You Get In Now?

Keith Gill, aka Roaring Kitty, has a new favorite stock.

The man behind the GameStop meme stock phenomenon filed a disclosure with the Securities and Exchange Commission (SEC) on July 1 showing that on June 24, he took a 6.6% stake in Chewy (NYSE: CHWY) . As of the close of trading on July 3, that stake was worth about $217 million. That's a massive bet for Gill.

The combination of Gill's bullishness and his social media following has made the stock extremely volatile. Shares surged higher when Gill posted a picture of a cartoon dog on X in late June, and they moved again following the SEC disclosure. But Chewy stock has already given back most all the gains it made since Gill made his big purchase, and then some. That gives those who might be interested in following him into the stock an opportunity to get in at a similar price.

Should retail investors seriously consider taking a cue from this YOLO bet by the meme stock king?

Image source: Getty Images.

The leading online retailer for all kitties (and other pets)

Chewy is the biggest online retailer of pet products. Pets are common in U.S. households, and the amount people spend on them is growing rapidly. The American Pet Products Association forecasts that Americans will spend over $150 billion on their pets this year, up from $90 billion in 2018.

That puts Chewy in a favorable position. In online retail, size matters. It makes fulfilling and shipping orders more efficient, thus reducing one of e-commerce 's biggest expenses. Chewy uses that advantage in two ways. First, it's able to offer competitive pricing on pet supplies and over-the-counter medicines thanks to its operating efficiency. Second, it's leveraging its existing customer base to expand into new verticals.

Specifically, Chewy has expanded its efforts in advertising and healthcare. Veterinary care and pharmaceuticals account for more than 25% of that $150 billion in pet industry spending. That's a massive market for Chewy to take a slice out of.

Chewy Health is just getting started. The company opened four vet care clinics this year and plans to open up to four more by year's end. A higher mix shift to healthcare products among its online sales led to strong gross margin expansion in the first quarter.

Likewise, strong ad sales boosted revenue and gross margin. The company expects its advertising revenues will grow to become 1% to 3% of its total top line. While that sounds small, advertising sales can have a massive impact on the bottom line since ads command high operating margins.

A loyal core customer base

While the number of active Chewy customers has declined since the height of the pandemic, it has a growing core customer base.

Customers who use its recurring autoship feature accounted for 77.6% of sales in the first quarter. That was the highest percentage the company had ever recorded.

Autoship is a win-win for Chewy and its customers. Customers get small discounts on items they purchase on a regular cadence such as treats or medicine. Chewy gains more predictability about its customers' orders, can package more items together to reduce shipping costs, and experiences higher customer retention.

The company is working to increase customer loyalty with a new paid membership program, Chewy Plus, that offers unlimited free shipping, rewards, and exclusive perks. The program is currently in the testing phase.

Both autoship, its new membership program, and its growing healthcare business (with physical locations) can be great ways to foster customer loyalty, and they can all work in concert.

Is Chewy stock a roaring buy?

At their recent prices, Chewy shares look like good value.

The company's enterprise value is about about 20 times its forward EBITDA estimates. And it should experience strong bottom-line growth as revenue climbs higher and margins expand thanks to its advertising and healthcare efforts. Analysts currently expect its earnings per share (EPS) will grow 178% this year and 68% next year.

EPS growth was further supported by the $500 million share repurchase program management announced in conjunction with its first-quarter earnings report. It executed that share repurchase in one fell swoop last month, buying 17.55 million shares at a price of $28.49 apiece from a single entity. It still has over $500 million left in cash on its balance sheet, based on its first-quarter report, and it generates positive free cash flow every quarter.

While a stock-buyback deal at that price doesn't look that impressive when shares trade for around $25 today, it does suggest that management felt it was a fair price for the shares. And management has better information than any outsider about the future finances of the company.

With strong growth ahead of it, Chewy is a company worth owning. Investors just need to be aware that Gill's involvement with the stock could create a lot of volatility in the share price.

Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chewy. The Motley Fool has a disclosure policy .