3 Reasons to Buy Chewy Stock Like There's No Tomorrow

Shares of pet-supply retailer Chewy (NYSE: CHWY) may be up from May's lows. But it's far too soon to say investors are falling back in love with the once-hot stock. Chewy shares are still down nearly 80% from their 2021 pandemic-prompted peak, and currently priced right at analysts' consensus target of $25.44 (nearly half of whom only rate Chewy stock a "hold"). Clearly, the jury is still out on this company's prospects.

Forward-thinking investors, however, might want to go ahead and consider diving into Chewy stock anyway despite the apparent lack of serious bullish interest. The market seems to be looking right past three big reasons to own this stock.

3 reasons to buy Chewy stock

You're likely familiar with the company (particularly if you're a pet owner). Chewy sells a range of pet toys, food, medicines, and other pet-related products. It's distinctly different than names like Petco Health and Wellness and Petsense, though. Whereas most of its competitors manage a brick-and-mortar presence, Chewy's been built from the ground up since its 2011 founding to be an online-only operation.

This has made a world of difference, too. Retailers like the aforementioned PetSense and Petco overbuilt their physical footprints in the 90s and early 2000s without properly preparing for -- or even sensing -- the depth of the disruption that e-commerce would eventually cause. All these chains have obviously adapted since then. But most of these chains are also still struggling to optimize their brick-and-mortar presence for modern-day consumerism.

Chewy has capitalized on its efficiency advantage in the meantime too, turning $11.1 billion worth of sales into net income of $39.6 million last fiscal year. That's hardly high-margin, but it's respectable for a company that for most intents and purposes is still in its start-up stage.

There are three clear reasons to believe the online pet-supply retailer is ready to enter the next, higher-margin era of its existence.

1. People still love their pets!

Peoples' interests and hobbies come and go. Their interest in pets, however, has surprisingly persistent staying power. The American Pet Products Association reports that U.S. consumers collectively shelled out $147 billion on their critters last year. That's up more than 7% from 2022's tally despite the challenging economy, and en route to a projected $150.6 billion this year. Indeed, many pet owners report they've willingly suffered some financial stress taking care of their furbabies.

Overall pet ownership rates contracted last year, for the record. Again according to the American Pet Products Association, the 70% of U.S. households that were home to at least one pet in 2021 slumped to only 66% in 2022 (2023's data isn't yet available). Just bear in mind that pet ownership jumped during and because of the COVID-19 pandemic. In pre-COVID 2019, only 67% of U.S. households were home to a pet.

2. The pet-supply business is increasingly online

Like most other retailing, more and more pet-supply purchases are being made online. Consumer goods market research outfit Packaged Facts reports that over one-third of the United States' pet-supply shopping is now done online, and predicts that 45% of it will be done via the internet by 2026.

This growth isn't apt to end there, however. Bloomberg Intelligence predicts that the U.S.'s pet-supply e-commerce market is set to double in size by 2030, when it should be worth roughly $60 billion. For perspective, Chewy is expected to do $12 billion worth of business this year.

Obviously, Chewy won't win all of this market growth for itself. As was noted, players like Petco and Tractor Supply 's Petsense now operate an online presence as well. But Chewy is likely to capture more than its fair share of this growth, in that it's simply better equipped to compete with these brick-and-mortar-first players online.

3. Chewy is proving itself with real growth

Finally, one only has to look at this company's past and projected revenue and earnings growth to see it's in the right place at the right time with the right platform. Although sales growth is expected to slow from here, profit growth is expected to accelerate now that Chewy has the size and scale it's been waiting on.

Data source: StockAnalysis.com. Chart by author.

It's worth adding that Chewy boasts a solid history of beating expectations. These analyst outlooks may actually underestimate how well the company is apt to perform going forward.

Just keep it in perspective

Is it an ideal stock for everyone's portfolio? No. It's still a very expensive equity despite the earnings growth that's likely in the cards, which could make the already volatile stock even more volatile. There's also no real barrier to entry into the online pet-supply market, leaving the door open to well-funded players like Amazon and/or Walmart should they wish to double down on their presence in the online pet-supply space.

If either prospective competitor were willing and able to put real pressure on Chewy, however, we probably would have seen it take shape and start mattering by now. It hasn't. The smaller, tightly focused company is leveraging both of these advantages, and reaping the benefits of doing so. The stock's apt to reflect this strength sooner or later. The potential reward is certainly worth it to patient, risk-tolerant investors.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Chewy, and Walmart. The Motley Fool recommends Tractor Supply. The Motley Fool has a disclosure policy .