Oversold and Diverging, Chewy Stock is Ready to Rebound

Key Points

• Chewy share prices are oversold and overextended in the face of growth and improving free cash flow. 
• Shareholder equity is up significantly at the end of F2024 and is expected to grow in 2025.
• Analysts are trimming their targets but see a floor in the market and a 75% upside at the consensus. 

Chewy's NYSE: CHWY share price is ready to rebound. The stock is trading near historic lows despite growth, margin improvement, and improving shareholder value, and it is oversold. The price action is extended, down more than 85% from its highest levels and diverging from the indicators. Indicators like the stochastic oscillator and MACD histogram are divergent and reveal mounting strength in the face of falling price action. And the rebound could start soon. The stock is trading near critical support, and there are catalysts for investors in the Q4 results and guidance. 

Chewy Falls On Tepid Guidance 

Chewy share prices fell following the Q4 release and guidance, extending the downtrend to critical levels. However, the move is due to the comparison to the consensus estimate and overshadows what are otherwise good results. The company reported $2.83 billion in revenue for a gain of 4.2%, which outpaced the consensus estimate by a slim 140 basis points. 

Gains were driven by non-discretionary items like health, food, and medicines, which underpinned strength in the auto-ship business. Auto-ship revenue grew by 8% to account for 76.2% of the total, a gain of 300 basis points YOY, which is notable because it is a recurring revenue stream. Active members are a weak spot and down 1.6% YOY but offset by increased spending per member. Spending is up 11.9% on deepening digital penetration into consumer lives. 

Margin is another mixed bag of results that equates to bullish news for the stock price. Adjusted EBITDA margin contracted by 30 bps, but all other comparisons are wider. Gross margin improved for the third consecutive year, and net income margin expanded by 80 bps to 1.1%. More significantly, the free cash flow improved by 59% to $67 million to aid improvements in the balance sheet and shareholder value. 

Guidance for F2025 is the toughest mouthful for the market to swallow. The company guided for accelerated growth this year and a wider margin, but the outlook aligns with the consensus estimates. It is good enough, but there is nothing for the market to rally on. 

Chewy Free Cash Flow Drives Value For Investors

The story with Chewy for the last two years is leaning into efficient operations while growing, focusing on improving margin and free cash flow. Now that cash flow is improved, the balance sheet is following suit. The balance sheet highlights include cash nearly doubling while inventory, investments, and receivables also grew. Debt is down, leaving equity up by roughly 200%. Shareholders shouldn't expect capital returns to start soon but may expect equity to grow as free cash flow supports growth and balance sheet health. 

Analysts continue to favor Chewy.com stock among pet names but are trimming their targets. Marketbeat.com tracks a half dozen reiterated or revised ratings, including several lowered price targets. The takeaway is that analysts rate the stock as a buy and see it trading near the bottom of the expected range. This suggests the market is at rock bottom with a potential for a 75% upside at the consensus. The fresh revisions indicate a range of $25 to $30, aligning with the consensus at the high end and offering more than 50% upside at the low. 

Chewy Stock Price Falls to Critical Support Level

The price action in Chewy stock is down more than 5% following the Q4 release but still above critical support at the all-time low. The market may move down to retest support at this level, but lower lows are not expected. Divergences in MACD and stochastic suggest the market is on the brink of a reversal and rebound that could begin anytime. In this scenario, the risk is to the upside, with critical resistance near $22.50. A move above that level would open the door to a complete reversal and sustainable rally.