1 Growth Stock Down 85% to Buy Right Now

In retrospect, there's no denying that Chewy (NYSE: CHWY) shares rallied too fast -- and too far -- in 2020. Oh, the move is certainly understandable. It was the middle of the pandemic, after all. People were stuck at home, cut off from other people and perhaps feeling a little lonely. Pets helped fill the void, and online retailer Chewy helped feed these pets.

But as the swell of interest in pets cooled, so did interest in the stock. That's why Chewy shares are now down 85% from their early 2021 peak. The sellers, however, may have overshot their target. That is to say, Chewy stock shouldn't have fallen this much. Investors may reverse themselves sooner or later, and will perhaps do so sooner than later. Here's why.

Chewy is different in one major way

If you're not familiar with it, Chewy is a pet supply retailer. Other names, including Walmart, Petco, Freshpet, and Amazon, are obvious rivals. Chewy is very competitive with these other players, though, by offering a wider selection, good prices, and convenient service.

But you've never actually seen a brick-and-mortar Chewy store? That's right -- you haven't. There are none. The company was established in 2011 with the intent of only ever being an online retailer. This has proven to be a brilliant strategy, too, in that the organization is built from the ground up to operate optimally as an e-commerce outfit.

Whereas conventional pet supply retailers are now struggling to support hundreds of stores across the U.S. while at the same time managing poorly developed online businesses, Chewy's fulfillment centers are singularly focused on online orders. They're also cost-effective, located outside of retail corridors and within easy reach of logistics service providers.

This hasn't necessarily made Chewy an unstoppable force. Revenue growth is slowing rather than speeding up, and is expected to continue slowing from last year's pace of 10% last year to only 5% this year. The company has turned a profit in the past, but not a consistent or reliable one. Last year's oversized increases in administrative and marketing expenses could linger for a while, keeping pressure on its bottom line for the foreseeable future. Interest expenses are soaring too.

Chart showing Chewy's revenue growth slowing down, and earnings growth speeding up.

Data source: Chart by author.

A serious tailwind is blowing

Take a step back and look at the bigger picture, though, and Chewy's story remains a compelling one. People (and especially those in the U.S.) are still pet lovers. The American Pet Products Association reports that 66% of U.S. households now own at least one pet. That's down slightly from the prior figure of 70%. That previous pet-ownership rate, however, is unusually high, reflecting the swell of demand seen during and because of the COVID-19 pandemic.

At roughly two-thirds of the population, pet ownership rates right now are in line with long-term norms. In the meantime, per-household spending on pets continues to grow. The American Pet Products Association estimates that overall domestic pet spending reached $143.6 billion last year, up 5% from 2022's tally.

Some of that modest growth can be chalked up to inflation. In that many people opted to begin purchasing less expensive food for Fido and Fluffy, however, that modest 5% uptick arguably understates people's willingness to continue covering the cost of owning a pet.

Whatever the case, this growth isn't expected to slow down anytime soon. Bloomberg Intelligence believes the global pet-care and pet-supply market will expand from around $320 billion per year now to $500 billion by 2030. More relevant to Chewy, Business Research Insights suggests the e-commerce sliver of the worldwide pet-care market is poised to grow at an annualized pace of more than 11% through 2028. Chewy's all-important North American market is expected to lead the way.

Chewy itself is well-positioned to capture more than its fair share of this growth. It just needs time. As of mid-2022, its average customer spent right around $460 per year with the company. A year later, the figure was $530. The number gets bigger every year a customer remains on board too. CEO Sumit Singh says five-year customers spend on the order of $700 per year with the company, with its longest-term users spending almost $1,000 with Chewy on an annual basis.

Buckle up for a wild ride

It's still not a stock well-suited for everyone's portfolio. Namely, between the lingering echoes of pandemic-prompted volatility and the fact that Chewy is a relatively small company, the stock remains subject to sizable, wild swings. Ergo, it's not for the faint of heart. If you can stomach the above-average risk, though, the potential upside is worth it.

This might help: As of the latest look, analysts' consensus price target stands at $25.42. That's more than 40% above Chewy stock's present value. Moreover, once a stock begins making measurable progress toward a price target, analysts will often raise those targets. Oh, and a heads-up: The company reports its fourth-quarter results on Wednesday, March 20.

Should you invest $1,000 in Chewy right now?

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Chewy, Freshpet, and Walmart. 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.


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