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SUMMARY
Parkev Tatevosian, CFA, discusses the current valuation and growth prospects of Chewy, highlighting its strong recurring revenue model and effective management. He argues that the company's financial performance and attractive price-to-earnings ratio make it a promising option for investors with limited capital.
MAIN POINTS
- Chewy's stock is down over 27% year-to-date but has recently rebounded from $17 to over $24 per share.
- Over 80% of Chewy's sales come from recurring revenue, supporting its $12.8 billion in trailing twelve-month revenue.
- Chewy's operating profit margin has improved from -15% in 2019 to 2.58%, reflecting successful operational investments.
- The company's return on invested capital exceeds its weighted average cost of capital by a 2:1 ratio, indicating efficient capital use.
- Chewy is trading at a forward price-to-earnings ratio of 13, near historical lows, and below the calculated fair value of $33 per share.
- Chewy's management effectively navigated the pandemic and reopening, positioning the company as an attractive investment.
DETAILED ANALYSIS
Chewy, an online pet retailer, has experienced a significant decline in its stock price, falling over 27% year-to-date, but has shown signs of recovery in recent weeks, rising from around $17 per share in mid-June to over $24. The pet industry continues to benefit from the trend of pet humanization, with consumers increasingly willing to spend more on their pets. Chewy's business model is particularly robust, with over 80% of its sales derived from recurring revenue streams, providing greater predictability and stability for its operations.
In the trailing twelve months, the company reported $12.8 billion in revenue, up from approximately $11 billion three years prior, demonstrating steady growth.
Managing a business of Chewy's scale is challenging due to its capital-intensive logistics and fulfillment operations. However, the company's focus on automation and operational efficiency has led to a dramatic improvement in profitability. Chewy's operating margin has risen to 2.58%, a notable turnaround from -15% in 2019, and it has maintained positive cash flow for several years.
A key metric, return on invested capital (ROIC), stands at 26.25%, which is more than double its weighted average cost of capital (WACC) of 12.82%. This strong ROIC-to-WACC ratio indicates that Chewy is generating substantial value from its investments, even as a company still in its growth phase.
Valuation metrics further support the investment case. Chewy is currently trading at a forward price-to-earnings ratio of just 13, near its lowest levels in recent years. Discounted cash flow analysis suggests a fair value of $33 per share, significantly above the current market price.
The management team has demonstrated resilience and adaptability, particularly during the pandemic and subsequent economic reopening, positioning the company well for future growth. These factors combine to make Chewy an appealing option for investors seeking undervalued growth opportunities.
LINKS
- YouTube channel membership for exclusive perks and early access.
- Special offer for The Motley Fool Stock Advisor.
- Parkev Tatevosian's book on stock evaluation.
- Fiscal.ai investment research platform with viewer discount.
- Webull investing platform with bonus shares offer.
- Substack newsletter subscription for monthly updates.