Up 75% from its 52-week lows, Chewy (NYSE: CHWY) may have investors feeling as though they've missed a golden opportunity. However, when we zoom out on the time horizon, it is abundantly clear that the best may be yet to come for the leading e-commerce pet specialty retailer.
One Wall Street analyst who is echoing these beliefs is Anna Andreeva with Piper Sandler. Raising their outlook on the stock from neutral to outperform, the analyst made a massive change to the company's one-year price target, moving it from $22 to $35. Compared to Chewy's current price of around $26, this implies a roughly 35% upside in the company's shares.
Here's why I can't help but agree with Andreeva, especially over the long haul.
Chewy's rising margins are still a developing story
A month ago, I highlighted five reasons to consider buying Chewy's stock -- all of which revolved around higher-margin opportunities. These included animal healthcare products, Chewy Vet Care, and CarePlus pet insurance, as well as private-label goods and sponsored ads. Combining all of these new products and services, Chewy's operations now have more higher-margin potential than ever before.
As Andreeva pointed out, these higher-margin revenue streams have helped the company's gross margin improve from 20% in 2019 to 30% today, while its net income margin went from negative 7% to positive 2.3%.
In addition to these new opportunities, Chewy continues to streamline its traditional e-commerce operations, reaching higher efficiencies as it goes. With autoship customer sales accounting for 78% of revenue, the company generates the majority of its business from recurring, scheduled orders, which it can continuously fine-tune its operations around.
Last but not least, Chewy's management noted that pet adoptions outnumbered relinquishments in the U.S. during Q1 for the first time since 2022, which could help restart the company's slowing revenue growth. Reporting earnings tomorrow morning, Chewy will give investors an update on its (hopefully) still-improving profitability and offer in-depth insights regarding its numerous high-margin revenue streams.
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Josh Kohn-Lindquist has positions in Chewy. 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.
