Chewy (NYSE: CHWY) has been a rollercoaster for investors over the past five years. It emerged from PetSmart in 2019, skyrocketing from its IPO price of $22 to a peak of $118.69 on Feb. 12, 2021.
Today, the tale is different – with Chewy trading around $17. An initial $10,000 investment would have seen impressive growth to nearly $54,000 only to dwindle back to $7,700. The stock’s allure dimmed as growth subsided and escalating interest rates weighed on its valuation.
Lets delve into Chewy’s current challenges and explore its potential trajectory over the next half-decade.
Image source: Getty Images.
The Growth Story of Chewy in the Last Five Years
Chewy witnessed a significant surge in active customers, net sales per customer, and total net sales in fiscal 2020 (ending January 2021) due to the pandemic driving more pet owners towards online shopping. Additionally, its adjusted EBITDA margins turned positive.
|
Metric |
FY 2019 |
FY 2020 |
FY 2021 |
FY 2022 |
FY 2023 |
|---|---|---|---|---|---|
|
Active customer growth |
27% |
43% |
8% |
(1%) |
(2%) |
|
Net sales per active customer growth |
8% |
3% |
16% |
8% |
8% |
|
Net sales growth |
37% |
47% |
24% |
13% |
10% |
|
Adjusted EBITDA margin |
(2%) |
1% |
1% |
3% |
3% |
Data source: Chewy.
However, after a robust period in fiscal 2020, fiscal 2021 witnessed a slowdown as the pandemic waned. This deceleration continued into fiscal 2022 and 2023 with a decline in active customers. Chewy attributed this trend to reduced discretionary spending on pets in a more challenging economic landscape and increased competition, notably from online giant Amazon, which bolstered its private label pet product offerings.
To counter the drop in active customers, Chewy is ramping up net sales per active customer by highlighting its higher-margin private label products, increasing advertising, and expanding its Chewy Health Insurance plans for pets. The company is also boosting its Autoship subscriptions, a move that saw their percentage of net sales rise from 69% in fiscal 2019 to 76% in fiscal 2023. Additionally, Chewy has curbed spending to stabilize its adjusted EBITDA margins, turn profitable based on generally accepted accounting principles (GAAP) over the last two years, and nearly triple its annual free cash flow (FCF) in fiscal 2023.
The Reign of Chewy’s High Growth: A Sunset on the Horizon?
Despite these promising bottom-line improvements, Chewy’s era of high growth may be drawing to a close. While the pet care market is forecasted to continue expanding at a compound annual growth rate (CAGR) of 6.45% from 2024 to 2032, this gradual progression may not suffice for investors seeking rapid growth opportunities.
Optimistically, analysts anticipate Chewy to outpace the broader market slightly. Projections indicate that from fiscal 2023 to 2026, revenue growth will hit a CAGR of 7%, while adjusted EBITDA will see a 21% CAGR. With its stock trading at 21 times this year’s adjusted EBITDA, the valuation appears reasonable relative to expected growth rates.
Predicting Chewy’s Stock Performance in Five Years
If Chewy sustains current valuations, fulfills analysts’ forecasts, and maintains its growth trajectory for another two years, it could rake in approximately $14.4 billion in revenue and $800 million in adjusted EBITDA come fiscal 2028. Given a consistent enterprise value to adjusted EBITDA ratio, the stock has the potential to more than double in value over the next half-decade.
While this would mark a commendable return over five years, it still falls short of historical highs. Long-term estimations should be viewed with caution unless Chewy can secure a steady stream of new customers. Consequently, my stance is that Chewy will climb gradually in the years ahead but may lag behind the higher-growth stocks in the market.
Should you invest $1,000 in Chewy right now?
Before diving into Chewy stock, ponder on these factors:
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon and Chewy. The Motley Fool has a disclosure policy.