The stock market soared in the first half of the year, with the S&P 500 confirming a bull market and then going on to reach additional record highs. Growth stocks led the gains -- but not all of these players have skyrocketed and reached their full potential. In fact, some have even fallen behind, meaning they've barely gotten started along their path to growth.
This is positive for us as investors because it allows us to get in on great long-term growth stories at reasonable prices. But how does one find them? One way is to look at stocks that have declined from previous highs, potentially creating buying opportunities for the savvy investor.
Chewy (NYSE: CHWY) is one of these stocks, having fallen more than 35% from its 52-week high even as the company's powering ahead on projects and reporting earnings growth. Is it time to buy Chewy on the dip? Let's find out.
Image source: Getty Images.
Chewy's loyal customer base
If you're a pet parent, you may have heard of Chewy. This e-commerce company sells everything you need to care for your furry and not-so-furry friends, from pet food and toys to prescription medicines and health insurance. Importantly, Chewy has built and sustained a loyal customer base that keeps returning month after month for their preferred items.
How do we know this? By looking at Autoship numbers. Autoship is a Chewy service that automatically reorders and ships your favorite products to you. Autoship sales drive Chewy's total revenue, making up more than 77% of it. Autoship sales have climbed steadily over the past three years, and in the most recent quarter, they totaled more than $2.2 billion. Net sales per active customer have also been on the rise, showing that regular customers are spending more and more on Chewy.
These two points offer us some visibility on future earnings, because Chewy doesn't have to depend heavily on acquiring new customers -- the regulars contribute significantly to growth.
Chewy started out offering its products and services in the U.S. and exclusively online, but in recent times, the company has launched expansion plans. It's opened its virtual doors in Canada, a market that it sees resembling that of the U.S. in terms of profitability. And Chewy was able to do this without an enormous initial investment, thanks to its already existing software infrastructure.
The online pet supplies powerhouse is also opening its doors in a more traditional way. Chewy just launched its first veterinary clinics and aims to reach the higher end of its four- to eight-clinic goal for 2024. The addition of clinics is positive because it broadens the revenue stream and offers Chewy a new way to promote its e-commerce products and services.
Free cash flow growth
I also like Chewy's financial picture. The company is debt-free and had more than $1.1 billion in cash at the end of the most recent quarter. Chewy's free cash flow and return on invested capital have also taken off over the past year.
CHWY Free Cash Flow data by YCharts.
Chewy recently offered a sign that it's particularly confident in its future as it launched its first-ever share buyback program, one that allows the repurchasing of up to $500 million in stock.
Meanwhile, Chewy stock has advanced about 5% this year, but it's still down in the double digits from about a year ago. That leaves the shares trading for 26x forward earnings estimates, compared to nearly 45x late last year. Considering Chewy's solid revenue growth picture, the loyal customer base that offers us visibility, and the company's expansion plans, this looks like a very reasonable price.
Of course, it's impossible to predict whether Chewy will take off in the second half of this year or if investors will have to wait longer to benefit from this growth stock. But that's OK.
If Chewy continues to progress as it's done in recent quarters, this company and stock have what it takes to deliver lasting earnings growth and potentially strong share performance to investors over time. This means that right now, with the stock down from its 52-week high, Chewy makes a fantastic addition to your portfolio.
Don’t miss this second chance at a potentially lucrative opportunity
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*Stock Advisor returns as of July 2, 2024
Adria Cimino 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.
