Chewy; It's Time To Take A Bite Out Of This eCommerce Pure-Play

3Q Earnings Are On Deck For This IPO Bomb

Chewy (CHWY) was one of 2018’s more talked about IPO’s and not because the company got off to such a fantastic start. After surging 50% the opening morning shares of this stock gave up nearly 40% of their value over the next six months. With shares of Chewy trading at a possible bottom and earnings due out after the bell the question now is, is it time to take a bite out of this stock? Is now the time to buy?

What Is Chewy Stock?

Chewy, along with its network of subsidiaries, is a pure-play on eCommerce in the U.S. The retailer is a specialist in the pet-care market but don’t laugh, there is money to be made in the pet care industry. Depending on the source and what you count, Pet care is worth $70 to $225 billion this year in the U.S. alone. Yes, that’s right, I said billions. And the figures are growing above 3.5% annually.

According to the American Pet Products Association, total spending in 2018 topped $72.56 billion and is expected to expand by 3.8% in 2019 and again in 2020. The increase in spending is driven in large part by Millennials as they move out and form households ... and shows no signs of slowing down.

Businessinsider.com says total U.S pet care spending could hit $280 billion by 2023 as products become more and more specialized. Our pets are like part of our families and are increasingly treated that way. That means high-dollar gourmet pet foods, specialty health-care products (CBD is a hot one right now), and lots of medicines. Chewy is at the digital forefront of this market.

eCommerce Is Driving Growth Around The World

eCommerce is one of the fastest-growing segments of the U.S. economy. Total eCommerce spending is expected to grow by 14% in 2019 to $587 billion. The lion’s share of that business will be conducted through Amazon but not all of it. Retailers like Walmart, Target, Home Depot and Nike have been fighting back against Amazon by launching their own eCommerce outlets. They’ve all experienced robust growth, rising revenue, and gained digital market-share because of it.

Even smaller retailers like Land’s End are having success with eCommerce. Land’s End reported a 7.4% increase in YOY eCommerce sales for the 3rd quarter and is expecting high-single-digit growth in digital for the foreseeable future. The bottom line is that Chewy is well-positioned at the nexus of two intersecting trends. The company is taking advantage of two large and growing markets, pet care and eCommerce.

The Outlook For Growth Is High

Over the past three quarters, the first three since the company went public, Chewy has posted revenue gains in the range of 45% YOY and 4-5% sequentially. The current consensus is running true to that range, about 4.4% sequentially, and bolstered by a number of positive analysts calls over the past few weeks. The only downside is that, while revenue is expected to come in strong, the consensus for EPS has been falling.

Morgan Stanley upgrades to Overweight - Morgan Stanley analyst Lauren Cassel thinks Chewy’s revenue could double over the next four years due to secular growth within the pet care market. Her team raised their rating to Overwieght citing valuations and the recent 33% drop in share prices.

Credit Suisse Initiates With And Outperform rating - Credit Suisse says Chewy is well-positioned amid a robust pet-care market. The auto-ship feature is being well-received by clients and resulting in strong recurring revenue. The forecast double-digit top-line growth over the next several years.

A Reversal In Progress

Shares of Chewy shed nearly half of their value since hitting the post-IPO peak. Over the last few months, the stock has been a steady down-trend but may have hit a bottom. Price action has bounced from the $22.50 level and may be forming a double-bottom. The indicators MACD and stochastic are both bullish and support the bottom, the question now is how high will prices go. The baseline of the double-bottom is near $28.50 which leaves plenty of room for the stock to move without confirming a reversal. With earnings due out after the bell today, waiting to make big purchases of this stock until after the release is the prudent thing to do.