Just when it looked like the stock was recovering, POW! Chewy(NYSE: CHWY) shares are up-ended again. What started out as a winning month ended up turning into a loser. Chewy stock now sits 84% below its early 2021 peak, thanks to its recent 10% setback. Perhaps investors finally made a judgment call on the company's recently announced layoffs. Or maybe it was Bank of America's recent downgrade of the online pet-supply retailer due to persistently high inflation that's taking a toll on pet-related spending.
Whatever the cause, you might want to use this weakness as an entry point into a new position in Chewy stock. Although economic headwinds may be blowing right now, this won't always be the case. What likely will be the case is people's unending willingness to pamper their pets as much as possible.
Chewy's place in a fast-changing market
It's a seemingly crowded arena. Petco, Tractor Supply's Petsense, and PetSmart are just some of the fragmented industry's biggest names. Never even mind that outfits like Walmart, Target, and Kroger are leveraging their enormous reach in an effort to win some of this business for themselves. It could be tough for a relative newcomer like Chewy to penetrate this market.
It's this newness, however, that makes Chewy such a compelling prospect. It's not saddled with all the costly and complicated baggage of building a brick-and-mortar retail business first and then adding online shopping later. Chewy's been built from the ground up since launching in 2011 to be nothing but an online retailer. That's a serious competitive edge. Its warehousing and operations are optimized for quick, cost-effective online order fulfillment.
And as it turns out, it can compete with the biggest and best names in the e-commerce business. Chewy did a little over $10 billion worth of business last year, and is expected to generate more than $11.2 billion in sales for the year currently underway. Analysts are looking at a top line of nearly $12.3 billion next year.
For perspective, Mordor Intelligence estimates the U.S. pet food and supply market is currently worth just under $77 billion.
The bearish arguments up-ending a rebound
However, the market's growth may be slowing down. That's Bank of America analyst Curtis Nagle's concern, anyway. Explaining his recent downgrade of Chewy stock to a sell rating, Nagle points to BofA's credit card data showing a contraction in pet spending during the third quarter of this year.
That worry jibes with an observation that BNP Paribas packaged food analyst Max Gumport made mid-year. Gumport says premium pet foods' share of the United States market fell 2.9 percentage points during the three-month stretch ending in July.
The growth rate of non-premium pet food is also slowing, in step with the falling number of households with at least one pet. The American Pet Products Association reports that only 66% of U.S. homes are also home to a pet, down from last year's figure of 70%. Maybe America's love affair with its furbabies is peaking.
The alarm bells may be ringing louder than is merited for Chewy, however.
The rest of the story
While there is a headwind blowing, bear in mind that the shrinking number of pet parents is down from the swell of pet ownership spurred by the COVID-19 pandemic lockdowns (which left many households looking to pets to help pass the time). At 66%, the nation's pet ownership rates are merely back to pre-pandemic norms. Presumably, the industry's longer-term growth trend will rematerialize sooner than later.
Inflation is a legitimate worry as well. Indeed, Bank of America's Nagle cites Chewy's growing selling and administrative expenses as another reason for BofA's downgrade. These costs are up to the tune of 20% through the first half of this year, outpacing sales growth.
Inflation is finally starting to level off to palatable levels, though. Last month's core consumer inflation rate fell to a more than two-year low of 3.2%, and the Federal Reserve believes this figure will continue to shrink through 2026.
Perhaps the top reason to take a shot on Chewy at its current price, however, is the most obvious one: its business model. Consumers are increasingly willing to purchase their pet supplies online. Bloomberg Intelligence predicts annual online sales of pet supplies within the United States could double in size between now and 2030, reaching $60 billion in the final year of this time frame. This growth plays right into Chewy's competitive advantage.
Time for risk-tolerant investors to nibble
While Chewy is positioned to catch more than its fair share of the pet supply market's growth, it's not necessarily the perfect pick for every single portfolio. It's a relatively young stock in a rapidly changing sliver of a dynamic industry. It's difficult for investors to figure out a fair price for this stock. That's why it's still all over the map, so to speak.
If you can shrug off any near-term volatility and stay focused on the longer-term opportunity, however, Chewy is a bargain-buy here. And the analyst community agrees. It's considered a buy, on average, with a consensus price target of $31.78. That's 74% above the stock's present price, and it's yet another reason to take a speculative shot on this beaten-down ticker.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America, Chewy, Target, and Walmart. The Motley Fool recommends Kroger and Tractor Supply. The Motley Fool has a disclosure policy.