Chewy (NYSE:CHWY), a leading pet products e-commerce business, has seen increased market volatility after Keith Gill, popularly known as Roaring Kitty on social media platforms, revealed a $245 million stake in the company recently. This volatility creates an opportunity for long-term-oriented investors.
Chewy stock surged 20% in pre-market trading last Monday before ending the day down nearly 7% as investors reacted to a lawsuit filed against Keith Gill. The lawsuit alleged that he has been involved in pump-and-dump schemes in the last couple of months, mainly involving GameStop (NYSE:GME) shares. Nonetheless, I am bullish on CHWY stock, as I believe the company still enjoys a long runway to grow.
Short-Term Volatility Is Unavoidable
Roaring Kitty, who reportedly profited more than $300 million by investing in GameStop during the original meme stock mania in 2021, usually invests in beaten-down, highly-shorted stocks. His $245 million investment in Chewy translates to a 6.6% ownership stake in the company, making him its third largest shareholder.
Wall Street analysts believe Roaring Kitty’s investment in Chewy will substantially increase the volatility in Chewy stock. Mizuho Securities analyst David Bellinger noted that retail investor activity on several online platforms such as Reddit (NYSE:RDDT) and X has increased in the last few days, which points to increased volatility, as these investors are likely to trade in and out of Chewy based on technical indicators and Roaring Kitty’s actions.
CFRA Research analyst Arun Sundaram, in a note to clients, wrote that investors should brace themselves for heightened volatility, as Chewy will be treated similarly to any other meme stock.
Prospects Look Bright
Chewy’s revenue growth has decelerated in recent quarters after peaking during the pandemic when mobility restrictions helped the company get more sales. In Fiscal 2024, which ended in January, Chewy’s revenue grew just 10% YoY, a significant slowdown from revenue growth of 37% and 47% reported in Fiscal 2020 and 2021, respectively. Looking at the long term, there is hope that growth will accelerate.
Chewy’s revenue diversification efforts will fuel revenue growth in the coming years. Since launching CarePlus in 2021, the company has aggressively made inroads into the pet healthcare and insurance businesses. Chewy now offers total wellness packages for pets, comprehensive insurance plans, and accident-only insurance packages.
According to Allied Market Research, the global pet insurance market will grow at a CAGR of 14.5% through 2033, lifting the market value from $10.1 billion in 2023 to $38.3 billion by 2033. Chewy’s strategic exposure to this sector, therefore, will help revenue growth.
Chewy’s expansion into the pet pharmacy business is also encouraging, given that the U.S. pet medication market is expected to grow at a CAGR of close to 6% through 2029. Last December, Chewy CEO Sumit Singh claimed that the company is on track to exceed $1 billion in annual revenue from the Pharmacy business. Pet owners are showing an increasing preference for uploading prescriptions to online pharmacy platforms to get medications delivered to their doorsteps.
The company now offers advertising solutions on its online platform as well, which allows businesses to advertise their products directly to Chewy’s more than 20 million active user base. In the long run, this strategy will result in higher monetization levels of platform users.
Chewy’s investments in building and maintaining automated fulfillment centers also paint a promising picture of the company’s future. These automated fulfillment centers are likely to reduce the time it takes for the company to deliver products ordered by customers, which may lead to potential competitive advantages in the future.
The company is already offering same-day delivery services in select markets, and a national rollout of same-day delivery will help Chewy thwart the threat of increasing competition from well-established e-commerce platforms.
The Improving Financial Performance
Chewy’s revenue growth has decelerated from pandemic highs, which does not come as a surprise, given how mobility restrictions in 2020 and 2021 led to a surge in demand for pet product delivery. In the first quarter of Fiscal 2025, revenue grew by just 3% YoY, in contrast to the double-digit growth the company registered in Fiscal 2021 and 2022. However, there are signs of a recovery.
Chewy’s strategic decision to expand into the high-margin pet healthcare business is delivering promising results already, with its Q1 adjusted EBITDA margin hitting 5.7%, a notable improvement from just 3.1% in the previous quarter. The company positively revised adjusted EBITDA margin expectations for the full year by 40 basis points after reporting Q1 earnings, which is a clear sign that Chewy is beginning to benefit from its growing exposure to high-margin business sectors.
In Q1, pet spending per customer grew almost 10% YoY to $562, which indicates that Chewy has become the go-to pet care e-commerce retailer among its regular customers, even amid inflationary pressures. This customer stickiness could be an early sign of long-lasting competitive advantages.
Chewy’s management is growing in confidence about the potential of the company to generate substantial free cash flows in the future, evident from the decision to repurchase $500 million worth of shares from Buddy Chester Sub LLC. Once the transaction is complete, the company will retire 17.55 million shares. Chewy, in the long run, is likely to reward shareholders handsomely with buybacks.
Is Chewy Stock a Buy, According to Analysts?
Based on the ratings of 23 Wall Street analysts, Chewy comes in as a Moderate Buy. The average CHWY stock price target is $26.23, which implies upside potential of just 8.3% from the current market price.
The improving financial performance and Chewy’s aggressive expansion into new business verticals and markets should result in upward-trending price targets in the long term.
The Takeaway: Short-Term Volatility Needs to be Ignored
In my view, long-term-oriented investors should ignore the expected uptick in Chewy stock’s volatility resulting from Roaring Kitty’s investment in the company. Although Chewy may perform like a meme stock in the short run, long-term stock prices will be determined by the company’s fundamentals, which are headed in the right direction.
