Like bargain-priced stocks? Most investors do. After all (presuming the company in question is worth owning), stepping in at a lower price leads to better net returns than diving in at a higher one.
With that as the backdrop, there's one beaten-down stock that growth-minded may want to consider adding to their portfolio sooner rather than later: Chewy (NYSE: CHWY) . It's in the right place at the right time with the right way of offering its products.
What makes Chewy different also makes it better
On the off-chance you're reading this and aren't familiar with Chewy, it's an e-commerce website specializing in the sale of pet supplies. It's distinctly different from companies like Petco Health and Wellness (NASDAQ: WOOF) and PetSmart, however. Founded in 2011 well after so many other brick-and-mortar rivals had set up shop -- Chewy is only an online retailer.
It seems crazy on the surface. PetSmart, Petco, and Tractor Supply 's Petsense all enjoyed the advantage of not only already being established brands at the time, but were able to leverage and combine their brick-and-mortar businesses with their online ones established in the meantime. Never even mind the presence of powerhouse players like Walmart and Amazon . And for the record, it's not been easy. Chewy's only managed to turn the smallest of inconsistent quarterly profits since 2021.
In one overarching way, however, launching an online-only business so long after the e-commerce industry had gelled has proven brilliant. That is, brick-and-mortar competitors like Petco and PetSmart are still operating physical stores while also managing online operations established in the infancy of the e-commerce era. The former is an increasingly expensive liability, while the latter is less than optimal for the modern era of online consumerism. This is in stark contrast with Chewy, which was able to launch having already learned valuable lessons from others' e-commerce mistakes and build its business from the ground up solely with online shopping in mind (One caveat here: Chewy was owned by PetSmart from 2017-2019, but it fully split from PetSmart not long after it went public in 2019).
The thing is, the plan is working. Whereas retailers like Tractor Supply's Petsense and PetSmart are only seeing anemic growth (if any at all), Chewy's revenue growth is at least measurable and consistent. This year's expected top-line growth of 5% should be matched next year, according to analysts. And, there's much more of the same kind of growth in store -- and perhaps more -- for the future well beyond that.
Online pet supply shopping is poised to grow
Like so many other categories of consumer goods and discretionary products, the pet supply business is increasingly moving online. Although lackluster this year due to a combination of soaring prices and cash-strapped consumers, data from IBIS World suggests that over the past five years, the United States online pet supply industry has grown at an annualized pace of nearly 13%.
This growth still only scratches the surface of the opportunity, however. A forecast from Bloomberg Intelligence predicts that online pet supply sales in the U.S. could nearly double between last year and 2030, reaching $60 billion per year in the final year of the timeframe.
Illustrating this business's potential growth another way, market research outfit Packaged Facts reports that e-commerce's share of the nation's pet-supply industry was only 18% in 2018 before reaching 37% last year, en route to a predicted 44% share by 2028. Assuming consumers continue to seek out convenience and cost-effectiveness though, the online pet-supply business could continue growing at this clip for many, many more years beyond 2028.
Being dedicated to an online-only operation and managed cost-effectively, Chewy stands to gain more than its fair share of this growth. It also stands to see even faster earnings growth, now that it's achieved meaningful scale.
The post-pandemic pullback has run its course, and then some
None of this is exactly news to investors or analysts, of course. This begs the question: Why is this supposedly great growth stock trading down 75% from its early 2021 high?
There's a perfectly good answer. That is, like so many other tickers at the time, this one was catapulted higher during and because of the COVID-19 pandemic simply because the world was doing so much online shopping at the time. Almost euphoric then, investors didn't entirely care that Chewy was only marginally profitable at the time, and wouldn't remain so just yet.
They would eventually care, however. The stock's price has been corrected in the meantime.
It's arguably been over corrected though, reflecting post-pandemic frustration rather than the compelling future that's now straight ahead. Even with merely modest top-line growth in the cards this year and next, per-share earnings are expected to improve from last year's $0.09 to $0.22 this year to $0.45 per share next year, proving that Chewy can sustain a respectable, growing level of profitability . This slow but persistent improvement is a big reason shares have been able to push up and off of their record lows reached in April of this year -- the market's finally starting to see the light.
Even so, the gains seen since April are likely only the beginning of a much bigger, prolonged advance. Chewy stock could turn into a particularly strong performer once consumers finally shake off the economic lethargy that interest rate cuts are intended to resolve, allowing consumers to spend a little more on their pets again.
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 .
Most Popular
Comments / 0