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Is Chewy Stock Man's Best Friend Or A Pest? The Street Debates

Is Chewy Stock Man's Best Friend Or A Pest? The Street Debates

Online pet products retailer Chewy, Inc. (NYSE: CHWY) began trading in mid-June and the analyst IPO quiet period has lifted. Is the stock is man's best friend or a pest?

The Analysts

Wells Fargo's Brian Fitzgerald initiated coverage of Chewy with an Outperform rating and $40 price target.

UBS' Eric Sheridan initiated coverage at Buy, $42 price target.

Bank Of America's Nat Schindler initiated at Buy, $40 price target.

Barclays' Deepak Mathivanan initiated at Equal Weight, $32 price target.

Raymond James' Aaron Kessler initiated at Market Perform, no price target.

Shares of Chewy were trading lower by 3% to $33.36 at time of publication.

Wells Fargo: 3 Tailwinds In Favorable Environment

Chewy earns the title of being the largest e-commerce platform that focuses on pet products in the U.S. and faces three tailwinds to support further growth, Fitzgerald wrote in the note. These include:

  • Growing rates of pet ownership.
  • Rising sales in premium consumables, health care, services and products.
  • The pet industry is mostly resilient to economic downturns.

Fitzgerald said Chewy is able to stand out in the competitive landscape through a highly differentiated customer experience that is reserved for only the best-in-class companies. Chewy employs more than 1,600 customer service representatives in the U.S. and 25% of all orders involve some form of interaction.

The company also boasts three times more brands compared to independent retailers and twice as many compared to major pet stores. Fitzgerald highlighted that Chewy's delivery speed is equal to if not better than, Inc. (NASDAQ: AMZN)

Related Link: Wedbush Initiates Coverage On Chewy: 'We Await A Better Entry Point'

UBS: Revenue And Profit Outlook

Investors looking at Chewy's business are likely debating if the company can achieve a 20% revenue growth rate in the next three to five years, Sheridan wrote in the note. This growth rate appears to be reasonable with the industry growing at a 4% compounded annual growth rate through 2023. Chewy should show a 22% revenue CAGR over the same time period.

Sheridan said the company has already shown leverage on cost of goods sold, which helped bring in 280 basis points of gross margin expansion since 2017. Gross margins should rise to 25% over the next five years and the company could become EBITDA positive in 2021 and EPS positive in 2022.

BofA: Forget The Amazon Threat

Chewy's total addressable market in the U.S. of $55 billion could expand to $66 billion by 2023, Schindler wrote in the note. Over the same time period, e-commerce penetration ill rise from 17% to 28%. Encouragingly, the online pet market is far from a "winner take all" and the company is well positioned to grow despite competing against Amazon.

Chewy's customer support team was cited by BofA's checks with pet owners as a differentiated factor as less than 1% of respondents highlighted a negative experience. The analyst said Chewy can deliver a package to 80% of the U.S. population and overnight and 99% of the population in two days.

Barclays: 4 Concerns

Chewy deserves credit for growing to become a business that does $3.5 billion in revenue, but Mathivanan said four key concerns overshadow the positive attributes, especially with the stock trading at 2.3 times 2020 revenue. The four risks Chewy faces moving forward include:

  • A sharp rise in customer acquisition costs over the past two years.
  • Penetration rates already stand close to 20% after including customer churn.
  • A relatively long payback period of 18-24 months which leaves minimal room for execution missteps.
  • Amazon is pushing to become an "aggressive competitor."

Related Link: MKM Weighs In On Chewy, Says Investors 'Hungry' For Pure-Play Online Pet Retailer

Raymond James: Fairly Valued Stock

Chewy boasts multiple positive fundamental attributes, most notably a large pet care market that continues to shift towards online venues, Kessler wrote. However, shares are "fairly valued" at its current valuation of around 2.4 times 2020 EV/Revenue versus the peer group of 3.4 times 2020.

Latest Ratings for CHWY

Nov 2020NeedhamInitiates Coverage OnBuy
Nov 2020Piper SandlerInitiates Coverage OnOverweight
Oct 2020JefferiesUpgradesHoldBuy

View More Analyst Ratings for CHWY
View the Latest Analyst Ratings


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