Online pet goods retailer Chewy’s [CHWY] share price has fetched its shareholders outsized returns so far this year. As of 2 October, the stock’s one-year return of 111.6% easily outperformed the US online retail industry’s 73.2%, Simply Wall Street data shows.
Compared to the S&P 500’s 4% rise during the first three quarters, Chewy’s share price climbed a massive 89% to $54.83 in the same period.
Interest in Chewy’s share price began to pick up at the start of the year, following coronavirus-induced global lockdowns that raised demand for the speciality retailer’s online services.
By the end of the first quarter, when most stocks were reeling from the market downturn, Chewy’s share price was up 29.2% at $37.39. While that growth slowed down in the second quarter — it rose just 19.2% in Q2 — it has since picked up again.
Chewy’s share price rose 22.6% in its latest quarter, during which it reached an intraday all-time high of $74.84 on 2 September. As of 8 October, the stock sits at $57.04 — below its 50-day moving average but above the 200-day moving average.
This slight pullback has some investors considering whether Chewy’s share price is at a breakout level.
Hungry for e-commerce
Founded by Ryan Cohen and Michael Day in 2011, Chewy was later acquired in 2017 by pet superstore retailer PetSmart for $3.5bn in what was the biggest e-commerce takeover in history at the time.
Although the deal had been intended to strengthen PetSmart’s online business, the superstore retailer transferred part of its stake in Chewy as the two businesses diverged, in order to give way to an IPO.
Chewy debuted on the NYSE on 14 June 2019 with an initial offer price of $22 a share. However, although the stock looked to be building momentum in July and August, it never broke above the $38 mark. Shares in the pet retailer ended 2019 down 17.1% at $29.
Despite the rough start, the company has taken off this year amid rising demand for ecommerce services. In the first quarter ended 3 May, Chewy’s net sales grew 46% year-over-year to $1.62bn.
Chewy's Q1 net sales - a 46% YoY rise
Sales of pet products and services have grown significantly in the US, according to the American Pet Products Association. The market reached $95.7bn in 2019 and, with pet adoptions seeing a substantial uptick earlier this year, Chewy’s share price is very well positioned for future growth.
Its market dominance in such a niche area of retail allowed it to sustain that growth throughout the second quarter ended 2 August as well, with sales jumping another 47% year-over-year to $1.7bn.
Nat Schindler, an analyst at Bank of America, also notes that pet spending did not slow down in August. “We believe Chewy’s subscription-driven model is appealing [compared to] others that likely saw more one-time purchasing activity, and the recession-resistant pet sector is attractive in uncertain macro environments,” he wrote in a note to clients seen by Barron’s.
Time to buy the dip?
Throughout September, many stay-at-home stocks that had benefitted earlier in the year experienced a correction, most notably the massively overvalued tech stocks.
Chewy’s share price got caught up in the sell-off, falling 21% during September. Looking at the stock’s historical performance, the $52 level had presented a breakout point from its prior consolidation, according to Josh Arnold.
The stock has also been an outperformer so far this year, pointing to “a long runway for future growth”, Arnold wrote in Seeking Alpha.
“Chewy has only hit the zero line, in terms of 30-day rolling, returns four times this year: once during the pandemic panic selling, once in May, once in July — which lasted a couple of weeks — and finally, about a week ago. All three prior instances proved to be outstanding buying opportunities in Chewy, as the zero-line crossover on 30-day returns preceded massive rallies in all three cases,” Arnold added.
“All three prior instances proved to be outstanding buying opportunities in Chewy, as the zero-line crossover on 30-day returns preceded massive rallies in all three cases” - Josh Arnold
Mark Mahaney, an analyst at RBC Capital who is also bullish on Chewy’s share price, believes its accelerating revenues and record-high gross margins are strong indicators of future growth. Mahaney raised his price target from $62 to $74, according to InvestorPlace.
He’s not the only one. Out of 17 Wall Street analysts polled by MarketBeat, 12 rate the stock a Buy, giving Chewy’s share price an average target of $59.