Is Chewy’s share price overfed?

Chewy’s [CHWY] share price has bounded 140.48% during 2020, from a modest $29.00 at the beginning of the year to a close of $71.23 on 1 December. The March crash saw the pet supply retailer briefly in the doghouse, but Chewy’s share price recovered well from a $20.62 intraday low to post successive all-time highs in August, September and a record intraday price of $78.50 on 1 December. 

Recent weeks saw Chewy’s share price fluctuate, swinging between the $70 and $56 marks in a matter of days. The stock then appeared to be bedding in around the high $60s, but has now crept even higher. Investors will be keen to know whether the surge in Chewy’s share price through the year so far is justified, or whether the company is all bark and no bite.

Fetching returns

Eyebrows were raised at the appearance of Sumit Singh, Chewy CEO, in fifth spot on Bloomberg’s list of the best-paid executives, despite the company having never turned a profit. Following Amazon’s [AMZN] lead, Chewy has adopted a flywheel strategy to grow its customer base, with revenue from sales invested immediately into marketing efforts to attract new buyers — particularly on subscription deals for repeat purchases, such as cat litter. 

Like his predecessor, co-founder Ryan Cohen, Singh recognises market share as a key challenge for the company’s long-term sustainability, especially in the face of potential competition. If Amazon decides to grow its pet market, that competition will increase dramatically. Singh places his trust in Chewy’s approach to drive towards profitability.

The coronavirus pandemic has offered a helping hand, bringing about a spike in pet adoptions and the closure of grooming centres, as well as pushing ecommerce ahead of in-store shopping, all of which have seen Chewy’s share price and wider business grow. Between February and July, Chewy gained more customers than in the whole of the previous financial year. The American Pet Products Association predicts that pet owners will spend an unprecedented $99bn on pet products in 2020. These tasty treats have fuelled a doubling in Chewy’s share price and resulted in a $30bn valuation for the company.

Are they enough to influence the bottom line? Chewy’s latest earnings report on 10 September beat market expectations, with losses cut from $82.9m to $32.8m over the previous 12 months, and revenue increasing 47% to $1.7bn over the same period. Chewy’s share price gained 2% in response to the news. While Zacks data suggests that Chewy will still be loss-making into fiscal 2022, the $0.12 per share loss forecast for that year suggests it could contain one or two profitable quarters.

Health concerns

Chewy’s all-time high on 28 October was prompted by the announcement of its telehealth service, connecting pet owners to vets online.

Following a limited launch in Florida and Massachusetts, the service is now available in 35 states (as of 28 October), and is free to subscribers of Chewy’s auto-ship service — suggesting this could be another cog in the customer-acquisition flywheel. Singh explained that “visiting a local vet continues to be a challenge for many pet parents during this time”.

"visiting a local vet continues to be a challenge for many pet parents during this time" - Sumit Signh

Given the close relationship between Chewy’s rise and the conditions imposed by the pandemic, will recent vaccine announcements spell a decline in Chewy’s share price? 

Concerns that the ecommerce boom that has accompanied the pandemic might be on its way out have pushed Chewy’s share price, as well as other ecommerce stocks like Wayfair [W] and Etsy [ETSY], down in recent weeks. Investors will hope that Singh’s flywheel approach sees enough of 2020’s revenue successfully directed towards acquiring long-term customers to withstand any upcoming changes in market conditions.

A safe pet?

Most analysts take the view that Chewy will do exactly that. Among 16 analysts surveyed by CNN Money, 12 rated it a Buy and four a Hold. 

Among 14 analysts polled by CNN Money, the median price target of $74.50, would represent a 4.6% increase on Chewy’s share price as of 2 December. The high target of $100 is more than double the low target of $49. 

The median target’s position reflects a sense that Chewy will presumably decide to stop the marketing input into its flywheel and realise a profit at some stage, but a degree of uncertainty as to when this will be remains.

Chewy's share price, Yahoo Finance, 3 December 2020