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SUMMARY
Parkev Tatevosian, CFA, evaluates Chewy's current market position and determines that the stock is undervalued based on a discounted cash flow analysis. The analysis considers Chewy's growth prospects, risk factors, and capital structure to arrive at a fair value estimate significantly above its current share price.
MAIN POINTS
- Chewy's stock has declined 36% in 2026, prompting questions about its valuation.
- Forecasts project Chewy's free cash flow to reach $720 million by January 2027 and potentially $2 billion by 2034.
- Chewy's business model is capital-intensive, increasing both risk and potential upside compared to asset-light competitors.
- The weighted average cost of capital is calculated at 12.98%, reflecting Chewy's higher risk profile and anticipated future debt usage.
- The intrinsic value per share is estimated at $36.64, well above the current market price of $21.25.
- A buy rating is reiterated for Chewy as its share price is considered undervalued with a sufficient margin of safety.
DETAILED ANALYSIS
Chewy, the online pet retailer, has experienced a significant decline in its stock price, falling 36% in 2026 to around $21 per share. Despite this downturn, a detailed discounted cash flow (DCF) analysis suggests the stock may be undervalued. The analysis projects Chewy's free cash flow to reach $720 million by the end of its fiscal year in January 2027, with a further increase to $2 billion by 2034.
These projections are considered conservative, with the possibility for higher growth if Chewy successfully captures a larger share of the estimated $100 billion annual U.S. pet spending market. However, risks remain, including competition from major players like Amazon and the challenges of managing a capital-intensive, full-service e-commerce model. This model requires substantial investment in logistics, warehousing, and inventory, increasing both operational risk and potential reward.
The DCF incorporates a weighted average cost of capital (WACC) of 12.98%, reflecting Chewy's higher risk, including a beta of 1.5 and a cost of equity at 13.5%. The capital structure assumption includes a future shift to 10% debt and 90% equity, even though Chewy currently has no debt, as borrowing could become attractive as the company matures and its risk profile improves. The resulting valuation estimates Chewy's equity at over $15 billion, translating to an intrinsic value per share of $36.64.
This figure is significantly above the current market price, exceeding the typical margin of safety applied in such analyses. Consequently, Chewy is rated as a buy, with the current price presenting a potential buying opportunity despite recent underperformance.
LINKS
- YouTube channel membership for early access and exclusive perks.
- Special offer for The Motley Fool Stock Advisor.
- Parkev Tatevosian's book on stock evaluation framework.
- Fiscal.ai investment research platform with viewer discount.
- Webull investing platform with bonus shares offer.
- Subscription link for Parkev Tatevosian's monthly newsletter on Substack.