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Chewy Inc(CHWY-N)
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Where Will Chewy Be in 3 Years?

Motley Fool - Wed Nov 1, 2023

It's no mere fad -- people remain doggone crazy about their pets. A recent survey by Ally Financial indicates that 46% of "pet parents" with actual children say they spend at least as much on their furry friends as they spend on their own biological offspring. USA Today reports that one-third of U.S. pet owners have taken a second job to help cover pet-related costs, while two-thirds of these folks have cut back on their own personal spending to free up cash to spend on their critters.

As wild as those statistics may sound to some, they are nevertheless the reality -- at least within the United States. And they all bode well for online pet-supply store Chewy(NYSE: CHWY).

Built from the ground up for this opportunity

If you live in one of the 66% of U.S. households the American Pet Products Association says is home to at least one non-human animal (86.9 million homes), you've probably heard of Chewy. There's a reason you haven't seen a Chewy store, however -- there aren't any. In a competitive sea of brick-and-mortar pet stores, Chewy has made the strategic decision to limit its operation to an online-only business.

It's a savvy strategy, too.

Like most other slivers of the retail industry, pet-based purchasing is increasingly moving online. Market researcher Packaged Facts estimates that U.S. e-commerce sales of pet products will swell from last year's 36% of the entire market to 45% by 2026. Bloomberg Intelligence doesn't see this growth slowing down at that point either. It estimates online sales of pet goods in the U.S. will reach a whopping $60 billion by 2030 versus Packaged Facts' 2022 estimate of just over $30 billion.

That's a doubling, if you're keeping score at home -- a much faster growth pace than the industry's likely worldwide growth rate of less than 6% per year for the same period. Rival retailers like Petco and PetSmart are stepping up their e-commerce games. For instance, DoorDash will now deliver goods ordered from Petco.com.

All of these brick-and-mortar pet store chains have a tough road ahead if they want to compete with Chewy, though. That's because they were largely built well before online shopping went mainstream and physical stores became expensive to operate. Chewy was only launched in 2011, well after the era of mainstream e-commerce had begun. Its network of warehouses and fulfillment centers is singularly focused on delivering a great online shopping experience. That's why it's poised to win the bulk of the pet supply industry's brewing e-commerce growth.

Predictions

So what does this tailwind mean for Chewy and its stock? Obviously, nobody's got a crystal ball, but there are some reasonable extrapolations to be made from current trends. To that point, there are three noteworthy milestones this company is likely to reach within the next three years.

The first of these milestones is revenue-based. Given its current revenue trajectory and the online pet supply market's projected growth, Chewy could be booking in excess of $16 billion in annual sales by 2026. That's not wishful thinking or a random shot in the dark either. That's the analyst consensus.

And, as the chart below also illustrates, this degree of revenue growth will drive comparable earnings growth.

Chart showing past and projected revenue and earnings growth for Chewy.

Data source: StockAnalysis.com. Chart by author.

Technically speaking, Chewy is already profitable. It's just barely profitable though, having only recently shaken off the losses most young companies experience. Next year is arguably poised to be a breakout year for Chewy's bottom line, when the company is not boosted by the unusual demand created by a global pandemic. The profit explosion stemming from its scale is due the year after that. Analysts are calling for 2025 earnings of $0.94 per share, which is incredible, but not unreasonable.

Assuming Chewy's top and bottom lines roll in as expected, don't be surprised to see Chewy stock trading in the ballpark of $60 three years from now.

That's the outlook you have to take with the biggest grain of salt, of course. Even if the company performs exactly as expected, a stock's price is still mostly a reflection of how investors feel about an organization's growth prospects. If Chewy fails to win over the hearts and minds of investors, the stock could easily continue to struggle.

This is a company with a compelling story to tell, however, and the stock is certainly ripe for a rebound from exaggerated weakness. Indeed, the analyst community is sticking with its 12-month consensus price target of $32.65 despite the stock's continued slump. That's twice Chewy stock's present price, and would be a great start on any journey to the $60 mark.

Just bear in mind that this stock is apt to remain volatile no matter what. It's not exactly a pick you'd want to use as a core, foundational holding for your portfolio.

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Ally 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 Chewy and DoorDash. The Motley Fool has a disclosure policy.

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