Some investors may be wondering if Chewy’s (NYSE:CHWY) stock will end up like Pets.com’s stock did in the 2000s. While Chewy stock is unlikely to follow a similar path, if you’re concerned that today’s market environment parallels the elevator-up feel of the dotcom bubble, perhaps it’s time to cash in.
Pets.com may actually have been ahead of its time, as many people weren’t ready to buy their pet supplies online more than 20 years ago. However, people are used to buying almost anything and everything online today.
As such, Chewy’s subscription-based business model capitalizes on online shoppers’ propensity to seek convenience. However, in an era of high consumer prices, consumers may be forced to choose affordability over convenience.
That could be a problem for Chewy, and forward-thinking investors should do their due diligence instead of following the crowd and chasing Chewy stock.
High-priced pet food is the new normal
The chewy stock zoomed nearly 14% higher on Tuesday despite a lack of company-specific news, but that’s nothing compared to what happened in 2020 and early 2021. With the COVID-19 lockdowns prompting with pet owners buying supplies online, Chewy made a profit and its share price rose.
However, that was then, and it is now. While it’s true that Chewy’s share price is rising, don’t expect a repeat of the 2020-to-2021 rally. The catalyst of COVID-19 is in the rear-view mirror. In addition, the risk-on market sentiment of 2021 is lost due to continued price inflation and the steady increase in interest rates in 2022.
Speaking of inflation, many pet owners have probably noticed the shocking price tags on pet supplies lately. Chewy CEO Sumit Singh is clearly aware of this problem, admitting to Yahoo! Finance that there is “an unprecedented amount of inflation that has swept through the system.”
To account for the “unprecedented amount” of pet supply inflation, Singh observed that pet food price inflation is typically 2% to 4%, but it increased by “double-digit percentages” in past three years.
Unfortunately, if pet owners are hoping for significant, near-term relief from their pet supply bills, they shouldn’t hold their breath.
On that topic, Singh expects to see “incremental discounting” in the “last half of this year.” However, the Chewy CEO “doesn’t really expect … something structural that will change pricing going forward.”
However, Singh remains highly optimistic. He strongly expects “higher profitability” despite the impact of price inflation and promised to “return that value to the consumer.”
With that said, investors and buyers should have an “I’ll believe it when I see it” attitude.
A ‘solid start’ and a high valuation
“Fiscal year 2024 is off to a solid start,” Singh declared as Chewy released its first quarter results.
In fact, there’s no denying that the company’s revenue growth is “solid.” However, Chewy’s sales growth is not surprising by any means.
Drilling down to Q1 of FY2024, Chewy’s net sales rose 3.1% year-over-year to $2.88 billion. That’s a decent but not spectacular result, and it slightly beat analysts’ consensus estimate of $2.85 billion.
Even more impressive was Chewy’s adjusted earnings of 31 cents per share, compared to 20 cents in the year-ago quarter. Furthermore, this result easily beat Wall Street’s call for earnings of 20 cents per share.
It is certainly a positive sign that Chewy’s board of directors has approved share repurchases of up to $500 million. This indicates management’s confidence in the company’s future prospects, although confidence certainly does not guarantee results.
Back on the topic of convenience, Chewy’s autoship customer sales in Q1-FY2024 grew 6.4% year-over-year to $2.2 billion. Clearly, some consumers continue to enjoy Chewy’s subscription options. However, it is unclear whether this will continue despite uncomfortably high pet food prices.
That question can only be answered with certainty in the current and upcoming quarters. However, it appears that the market has already priced in its assumption of rapid, continued growth for Chewy.
This is where memories of Pets.com start to resurface. Believe it or not, Chewy’s GAAP-measured, trailing 12-month price-to-earnings (P/E) ratio is 135.94. To provide some context, the sector’s median P/E ratio is 17.87.
Singh said Chewy’s “value proposition” continues to resonate with our customers. Perhaps it is, but the company’s value proposition should not resonate with cautious investors.
Again, Chewy’s stock probably won’t collapse like Pets.com’s stock did 24 years ago. However, it is possible that Chewy will become the poster child of overvaluation in the mid-2020s if its P/E ratio and share price continue to fall.
Therefore, I encourage investors to chew on the aforementioned data pertaining to Chewy. Meanwhile, they should seriously consider taking profits and look for better bargains in the consumer-goods sector.
