Chewy is a leading online pet products retailer in the US, offering great selection and convenience for pet owners. It has seen tremendous growth fueled by the rise of e-commerce and the humanization of pets. However, Chewy stock trades at a very high valuation now after the huge run-up over the past year. While the long-term growth story remains intact, investors should wait for a better entry point.
Huge market opportunity in the growing pet industry
The pet market is rapidly expanding globally thanks to rising disposable incomes and the trend of pet humanization. In the US alone, over 70% of households own a pet. Americans spend over $100 billion annually on their pets on essentials like food and meds as well as discretionary items like toys and treats. This creates a massive addressable market for Chewy with plenty of room to grow.
Top player in online pet retail with loyal customer base
As a pure play online retailer focused exclusively on pet products, Chewy has used technology and customer service to build an incredibly loyal following. Their auto-ship subscription model encourages repeat purchases while personalized recommendations keep customers engaged. The convenience, selection, and subscription pricing all help Chewy retain and acquire users in a sticky ecosystem.
Financials sacrificed for growth in short term
While Chewy generates billions in sales already, it has focused more on customer acquisition and expanding market share versus profitability. Operating margins remain negative as a result since the priority is growth. However, as scale increases over time, Chewy should be able to leverage its infrastructure to become profitable. The play here is about long term domination versus maximizing near term earnings.
Frenzied valuation requires perfection
The meteoric rise of the stock has propelled Chewy’s valuation to astronomical levels, even when compared to other high growth tech names. It trades at over 5x forward sales while still losing money operationally. This leaves very little room for error and implies flawless execution amid intensifying competition. And any signs that growth could decelerate meaningfully could lead to a painful re-rating.
In summary, Chewy operates in an attractive space and is executing well currently as a leader in online pet retail. However, the valuation has gotten far ahead of itself, limiting upside from here without perfection. Investors should wait for a better entry point on material stock price weakness before investing in Chewy stock.