The company’s financial strength, upside opportunity, and cheap valuation make this an easy decision for me.
Pet e-commerce company Chewy (CHWY -1.89%) went public in 2019 and ended its first day of trading at about $35 per share. Considering it trades at around $18 today, I bet investors wish they had sold Chewy stock on day one.
In early 2021, Chewy stock traded at about $120 per share — I’m sure investors wish they had sold then, too.
But when determining what to do with Chewy stock today, selling should be completely ruled out of the equation. This company has a lot going for it, and shareholders will want to hold on for the ride, at least. But there’s good reason to buy as well, as I’ll explain.
What Chewy has done (and is doing) right
Retail e-commerce can be a surprisingly low-margin business. For evidence, consider the world’s largest e-commerce player, Amazon. The company’s North American and international business segments combined to bring in $484 billion in net sales in 2023. These operations are mostly e-commerce.
These two segments for Amazon only earned $12 billion in full-year operating income. That’s a paltry operating margin of 2.5%. And consider that Amazon has the requisite scale to be more profitable than its peers. Other e-commerce companies don’t have it so good.
In short, e-commerce margins are thin because consumers expect low prices, wide availability, and fast shipping. And companies consequently have high shipping-and-logistics expenses. But Chewy has found a way to overcome the challenge.
In 2020, Chewy launched automation enhancements at a fulfillment center, and it has continued upgrading its facilities since then. Its fifth automated fulfillment center is opening in the first half of this year.
Automation efforts have resulted in more efficient business operations for Chewy and have served as an undeniable profit-enhancing catalyst. The chart below shows a sharp increase in profitability when the first automated fulfillment center went live.
CHWY revenue (TTM) data by YCharts; TTM = trailing 12 months.
On its balance sheet, Chewy has $1.1 billion in cash, cash equivalents, and marketable securities, and it doesn’t have any long-term debt. That’s a strong position to be in. And now the business is basically operating at breakeven. In other words, Chewy should at least remain as financially strong as it is right now. And with further operational improvements, it could get even stronger.
The sky is still the limit for its core e-commerce business. According to a recent survey from the American Pet Products Association, 87 million U.S. households have a pet. By comparison, Chewy only has 20 million active customers.
Therefore, there’s clearly room to grow for Chewy, the top pet e-commerce company. For this reason (and given its financial strength), I don’t see a compelling reason to sell the stock today.
Chewy is playing a powerful wild card
There’s room for growth in its e-commerce business. Growth has admittedly stalled — its active customer base has declined by nearly 2% in the past year, which is concerning. But the company also has an opportunity to get more money from existing customers by offering new products and services.
Chewy is indeed offering new products and services in the pet healthcare space, which is an intriguing long-term wild card for investors. This includes the launch of clinics called Chewy Vet Care. CEO Sumit Singh said, “Our thoughtfully designed clinics will be unlike anything in the market.” The company will open at least four clinics this year.
Another new business venture is its nascent software operation. The company is looking to provide operating-system software to vet clinics. Not only is this an opportunity in itself, but it could also drive better sales for its e-commerce business because of the built-in buying incentives with its software.
The pet healthcare space is huge and growing. And by staking its claim, Chewy is hoping it can meaningfully grow its business by winning more sales from existing customers. This is called “wallet share,” and it could lead to substantial upside for this business if things go right.
This potential is why I believe that Chewy shareholders should at least keep holding for now — and other investors should consider buying. Not only is the company financially strong and has upside opportunity, but the stock is also quite inexpensive, trading at less than 0.7 times its trailing sales.
Investors won’t find many good opportunities that are this cheap. Therefore, Chewy stock is one to buy today for the long haul.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Chewy. The Motley Fool has a disclosure policy.
