Chewy.com Gets A Mouthful Of Profits: Shares Surge, More To Come

Key Points

• Chewy.com surges on improved profitability and raised guidance. 
• Short covering is driving the rally, too and may lead to volatility. 
• Analysts support the stock, their next move will decide where Chewy goes next. 

Chewy.com NASDAQ: CHWY delivered what investors have been waiting years to see; accelerating top-line growth, expanding margins, and a growing lever for profitability. The Q1 news has shares up more than 20%, which is a significant figure, and the analysts will propel it higher. They are recalculating their estimates and targets now, be sure there will be revisions and possible upgrades over the next few months.

The risk today is the short interest. The short interest is running hot at nearly 20% and a driving force in the post-earnings rally. The combination of high short-interest, bullish analysts' sentiment, and market-beating results may lead to volatility, but the bottom is in, and the reversal is on. 

Chewy.com Sparks A Short-Squeeze With Results And Guidance

Chewy.com’s results are impressive because they are industry-leading, and Chewy.com is already the bulk of the market. The revenue of $2.78 billion is up 14.7% compared to last year and beat the consensus and the industry average. The gains were driven by an increase in customers, revenue per customer, and auto-ship, which is the largest segment of the business. 

The margin news is also impressive, with the gross margin up 90 basis points and the adjusted EBITDA margin 150. Gross margin came in at 28.4%, adjusted EBITDA margin at 4.0%, to drive positive net income and better than expected adjusted earnings. The net income topped $22 million, up 20% YOY despite doubling share-based compensation expenses. More importantly, adjusted EBITDA and adjusted net income, indications of cash flow and FCF roughly doubled compared to last year. This performance level is expected to continue through the end of the year. 

The guidance is what got the post-release rally into overdrive. The company raised guidance for the year by 130 bps at the low end and may increase it again later this year. The $11.15 to $11.35 billion brackets the consensus but consensus is below the midpoint and offers significant outperformance on the bottom line. 

“ Net sales per active customer and Autoship customer sales also both reached new record highs for the company and continued to fuel customer loyalty and spend towards our platform,” said Sumit Singh, Chief Executive Officer of Chewy

Chewy.com Outpaces Competitors

Competitors like Pet Meds Express NASDAQ: PETS, Petco Health And Wellness NASDAQ: WOOF and The Wag Group NASDAQ: PET are growing their market share but not in the same way as Chewy.com. Chewy’s comprehensive approach to pet care allows it to dominate any vertical and is not afraid to enter new ones. This is why the analysts focus firmly on Chewy and why the market’s next move may come down to what they say next. 

As it is, the analysts rate the stock a Moderate Buy and have been firm in that sentiment all year. The price target was still trending lower ahead of the release but the trend was slowing and on the verge of a reversal. The most recent activity is an upgrade from Raymond James in early May to Outperform. They pegged the price at $36, which is below the consensus. The consensus still offers about a 15% upside after the 22% surge in price action. 

The Technical Outlook: Chewy.com Bottomed, Is Reversal Next? 

The action in Chewy stock has bottomed, and a reversal may be next. However, the 20% surge is driven by short-covering, so volatility may be expected. The question is if the market can get above the 150-day moving average. If it can, the reversal may gain momentum. If not, this market may remain range bound until more proof of improvements exists.