Pet-food retailer Chewy’s (CHWY) shares have swung sharply this year, but have remained in a wide $29-$43 range throughout. The company continues to post steady growth across core metrics, but the market has been quick to punish even minor signs of slowing momentum or shifts in outlook. With valuation levels that don’t screen as cheap on an absolute basis, any hint of underperformance tends to spark outsized reactions.
Elevate Your Investing Strategy:
- Take advantage of TipRanks Premium at 50% off! Unlock powerful investing tools, advanced data, and expert analyst insights to help you invest with confidence.
Chewy reported its most recent quarterly results last week, and shares dropped as much as 17% in the following trading sessions, though they have since staged a mild rebound from their lows. While there are some concerns around the profitability supporting Chewy’s bullish thesis, I don’t see any structural issues severe enough to trigger a re-rating or prevent the stock from bouncing back more substantially. To me, the recent correction appears driven more by valuation expectations than by fundamentals, and this mispricing may have already overcorrected.
For these reasons, I reiterate a Buy rating on Chewy under a longer-term perspective.
On Chewy’s Recent Results
At first glance, Chewy’s Q2 earnings looked solid. The company reported revenues of $3 billion, up 8.6% year-over-year and roughly 0.8% above market expectations. Earnings came in line with consensus, with Chewy posting $0.14 in GAAP EPS—a 79% decrease from last year, primarily due to a non-recurring tax benefit on the same quarter the previous year.
Digging a bit deeper, the underlying business metrics were also strong. Chewy’s Autoship customer sales—arguably the most important part of the business—totaled $2.58 billion (83% of net sales), a 14.9% year-over-year increase, reaching an annual run rate of $10 billion—also up 14.9% year-over-year.
Gross margins improved as well, hitting 30.4% in Q2, the highest level in the last five quarters, which translated into an adjusted EBITDA margin of 5.2% over the trailing twelve months. Free cash flow came in at $106 million for the quarter, totaling $463 million over the last twelve months—already above Fiscal 2024’s $452 million.
Additionally, management raised the high end of its annual sales guidance from $12.3–$ 12.45 billion to $12.3–$ 12.6 billion, while maintaining steady EBITDA margin guidance at 5.4–5.7%. According to CEO Sumit Singh, the expectation is that revenue growth will be moderately reflected in EBITDA (around a 15% incremental increase), with most of it being reinvested in growth—particularly in the Chewy+ membership program, where he expects incremental gains to be primarily driven by upselling and cross-selling.
The Elephant in Chewy’s Room
As a rule of thumb, companies valued at very rich multiples have to do more than just deliver results—they need to surpass expectations by a sizable margin and consistently raise guidance to justify their lofty multiples.
I believe part of the recent bearish post-earnings reaction to Chewy can be attributed to the fact that the company trades at a GAAP P/E of 105x and isn’t overdelivering on super-high growth.
But here’s the elephant in the room for Chewy. I’m looking at earnings through GAAP lenses because it provides a conservative baseline—a clean way to analyze statutory profitability, especially considering a key factor in Chewy’s thesis: stock-based compensation (SBC).
In a nutshell, SBC is when companies pay employees and executives with equity (options, RSUs) instead of cash. It doesn’t directly impact the cash flow statement (except through taxes), but under GAAP, it counts as an expense, reducing reported net income and causing dilution when shares or options vest.
When a business has a high SBC, the bullish case typically relies on the company being self-funding and growing, with dilution manageable as long as revenue growth exceeds the share count.
In Chewy’s case, over the last twelve months, SBC totaled $309.9 million, limiting net income to only $151 million. That means SBC more than doubled the reported profit—without adjustments, the company only “appears profitable” because it’s paying employees with equity.
So, Chewy does have a fragile net income, heavily reliant on non-GAAP metrics. If growth slows, dilution could erode value per share and limit upside.
Solid Top-Line Momentum Drives Confidence in CHWY
Although there are some concerns on the bottom-line front, the recent dip in Chewy isn’t entirely justified, especially since there hasn’t been any structural change in the company’s fundamentals compared to just a quarter ago.
On the contrary, the business is still growing top-line at a solid pace, and if we consider non-GAAP EPS forecasts, fueled by initiatives like frozen pet food, vet care clinics, and the Chewy+ program, analysts expect long-term EPS (three to five years) to grow at a 24.2% CAGR. That implies a forward PEG ratio (non-GAAP) of 1.2—a number that seems quite reasonable to me.
Looking at the price-to-sales ratio, Chewy currently trades at 1.2x, which represents a 28% premium compared to the sector average, but is still approximately 43% below its five-year average. In my view, this moderate valuation reflects a justified premium within retail, thanks to Chewy’s exposure to the pet market, which continues to enjoy secular tailwinds. At the same time, it signals caution from the market around sustainable earnings, given the company’s continued reliance on non-GAAP metrics.
Is CHWY a Buy, Hold, or Sell?
The consensus among Wall Street analysts on Chewy stock remains strongly bullish. Over the past three months, 17 out of 21 ratings were Buy, while the remaining five were Hold. CHWY’s average target price is currently $46, implying an upside potential of almost 20% from the latest share price.
Chewy’s Recent Dip Looks Overdone
I believe that, based on the recent post-earnings volatility in Chewy shares, the market isn’t demanding bottom-line improvements at any cost. Instead, it aims for growth to occur sustainably, without dilution from high stock-based compensation eroding shareholder value.
From a GAAP perspective, Chewy appears overpriced, which means the company needs to consistently outperform its earnings to sustain stock momentum. That said, this doesn’t imply any structural change that would undermine the bullish thesis over the past three months.
Given that, I think there’s a strong possibility the recent decline was overly harsh. With Chewy’s price already partially rebounding and solid numbers reported across the main metrics, I maintain a Buy rating on the stock.