Once you decide to invest in stocks, there are different paths you can take, depending on your time horizon, risk tolerance, and return expectations. One of those decisions involves investing in value or growth stocks.
The former approach attempts to profit by purchasing stocks at a bargain compared to certain valuation metrics. Meanwhile, the latter encompasses companies growing revenue quickly, and they might not have achieved profitability.
The stock of Chewy (NYSE: CHWY) belongs to the growth category. However, with the shares down 32% over the past year compared to a 23% gain for the Russell 3000 Growth Index, it also looks like it has appeal to value investors.
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Pandemic darling
Chewy sells food, supplies, and medicine for pets online. The company benefited during the early days of the pandemic when pet adoption soared as people were stuck at home. Their limited access to stores meant they turned to the site for their pet's needs.
In fiscal 2021, which ended on Jan. 30, 2022, Chewy's sales grew to $8.9 billion versus $4.9 billion at the end of fiscal 2019.
The share price soared as investors saw continued high growth for the company. In 2021, the stock rose 210%. But it appeared to have gotten ahead of itself as people returned to their normal routines.
A strong business opportunity
Fortunately, Chewy has an attractive and growing business. With its online-only focus, it offers pet owners convenience.
The retail U.S. pet market grew 8% last year to about $145 billion, according to Packaged Facts. It also estimates e-commerce commanded 37% of the market, up from 20% in 2018, playing to Chewy's strength given its online-only business.
It also operates in a recession-resistant industry since people tend to keep spending on their pets because many feel that they are valued members of the family. That's fortunate as fears about a downturn have been growing. For instance, job growth continued slowing, and the U.S. created only 114,000 jobs in July.
Overall consumer spending in the U.S. fell during the Great Recession, encompassing 2008 to 2010. But during those years, pet expenditures increased 12%.
Focusing on loyal customers
Chewy's active customer count has been dropping lately. In fiscal 2020, active customers jumped by 5.7 million to 19.2 million, reaching 20.7 million the following year. It was under 20 million for the period that ended on April 28, 2024.
I'm not concerned since the customers it retained spend more. In the latest quarter, sales per active customer were $562, up 9.6% from a year ago. And sales under its subscription Autoship program continue growing, up 6.4% to $2.2 billion.
Chewy has also become profitable. Last year, it earned $39.6 million, and in the first quarter, net income was $66.9 million.
The valuation
The valuation, measured by the price-to-sales (P/S) ratio, has gotten cheaper. The stock has a 0.9 P/S compared to over 6 at its peak in early 2021. Over the last five years, the shares sold at a median P/S of 2.1.
A growing, profitable, recession-resistant business combined with an attractive valuation adds up to a buying opportunity for long-term investors.
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Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chewy. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
