Chewy (CHWY) is without a doubt the leader when it comes to ecommerce pet food and supplies, and a case can be made that they are THE LEADER in all pet food and supply sales. In the most recent quarter, they reported ~20M active customers. In the USA, it is estimated that 85M families own pets. That puts Chewy at ~25% market share, which is extremely impressive considering the age of the this company.
Since 2016, Chewy has grown revenue 133%, 67%, 37%, and 47%. In addition, 68% of revenue comes from auto ship. Meaning that a lot of this revenue is reoccurring. Meaning that Chewy will not lose many customers and can grow revenue for cheaper.
Two factors to consider for growth
First is top line growth…
Sector predicted to have a CAGR 5.5%. Humanification of pets is real. People love their pets and spend a ton on them.
Company data shows that customers on average spend $400 in their second year, $700 in their fifth, and $900 in their ninth. This implies revenue growth just by keeping customers and during the pandemic, Chewy acquired many new customers.
Other avenues for future growth include, expanding internationally and sales of private label items and hardgoods. Sales of hardgoods YoY grew 67%, which is a good sign.
All in all, there are many ways for Chewy to maintain strong growth, and many ways for Chewy to surprise to the upside.
Second is bottom line growth…
Chewy is on pace to report it’s first profitable fiscal year. This is very impressive considering the growth rate of this company. YoY Chewy saw net margins increase 4.8% to a positive 1.8%. However, these margins are still very low and should continue to grow over time especially when you consider the reoccurring revenue from auto ship. A similar company with way more overhead, Petco, has net margins of +5%. In my opinion, Chewy can achieve net margins of 7.5% – 10%.
Applying a modest 25% revenue growth and net margins of 7.5% this would put revenue at ~27B, net income at $1.9B, and EPS of $4.51 in 5 years. Matching Petco P/E of 65, CHWY would be valued at $293. That’s a 225% increase! Too hard to pass up considering that’s BASE CASE!!
The cherry on the top…
Short interest % of float is 18.85% and volume is low at 1.6M shares. A spike in interest could drive the price up, squeeze shorts, and still provide fundamental value for new investors to buy creating more of a short squeeze until the stock seems overvalued which wouldn’t be until $200+.
This article was written by u/s7pence.
