Enjoy finding stocks at bargain prices? Most investors share this sentiment. After all, if a company is worth investing in, buying at a lower price point generally yields better returns than purchasing at a higher one.
With that context in mind, there is one undervalued stock that growth-oriented investors might want to consider adding to their portfolios sooner rather than later: Chewy (3.29%). The company is well-positioned in the market, offering its products in a manner that aligns perfectly with current trends.
Why Chewy Stands Out
For those who might not be familiar, Chewy is an e-commerce platform specializing in pet supplies. Unlike competitors such as Petco Health and Wellness (-0.49%) and PetSmart, Chewy operates solely online. Founded in 2011, after many traditional pet supply stores had already established themselves, Chewy is a unique player in the industry.
At first glance, this approach might seem risky. Established brands like PetSmart, Petco, and Tractor Supply’s Petsense had the advantage of combining their physical stores with online operations. Moreover, Chewy faced competition from giants like Walmart and Amazon. It’s worth noting that Chewy has struggled to achieve consistent quarterly profits since 2021.
However, launching as an online-only business well after the e-commerce industry matured has proven to be a strategic advantage. Competitors like Petco and PetSmart still juggle the costly burden of physical stores alongside their online presence, which was developed during the nascent stages of e-commerce. Chewy, in contrast, built its model with digital shopping at its core, learning from the missteps of others (though it was briefly owned by PetSmart from 2017 to 2019 before going public).
And this strategy is paying off. While other retailers like Petsense and PetSmart experience sluggish growth, Chewy’s revenue growth is not only noticeable but consistent. Analysts expect Chewy’s revenue to grow by 5% this year and maintain a similar pace next year, with potential for more growth in the distant future.
The Rise of Online Pet Supply Shopping
Much like other consumer goods sectors, the pet supply industry is increasingly shifting online. Although this year has been challenging due to rising prices and financially strained consumers, IBIS World data indicates that the U.S. online pet supply sector has grown at an annualized rate of nearly 13% over the past five years.
Yet, this growth represents just the beginning. Bloomberg Intelligence forecasts that U.S. online pet supply sales could nearly double by 2030, reaching $60 billion annually. To illustrate further, market research firm Packaged Facts reports that e-commerce accounted for only 18% of the pet-supply industry in 2018, climbing to 37% last year, with a projected 44% share by 2028. As consumers continue to prioritize convenience and cost-effectiveness, the online pet-supply market could sustain this growth trajectory well beyond 2028.
With its dedicated online-only model and efficient management, Chewy is poised to capture a significant portion of this growth, along with accelerated earnings as it achieves economies of scale.
Post-Pandemic Adjustments Have Settled
This isn’t news to investors or analysts, which raises the question: Why is this seemingly promising growth stock trading 75% below its early 2021 peak?
The answer lies in the pandemic-era surge. Like many stocks, Chewy soared due to the boom in online shopping during COVID-19. Investors, caught up in the excitement, overlooked the fact that Chewy was only marginally profitable at the time.
Eventually, reality set in, and the stock’s price adjusted accordingly. However, it’s possible that the correction was excessive, reflecting post-pandemic disillusionment rather than the optimistic future ahead. Despite modest growth forecasts for this year and next, per-share earnings are projected to rise from $0.09 last year to $0.22 this year and $0.45 next year, demonstrating Chewy’s ability to maintain and grow profitability. This gradual improvement has contributed to a rebound from record lows reached in April as the market begins to recognize the company’s potential.
Even with the progress since April, these gains may just be the beginning of a prolonged upward trend. Once consumers recover from economic sluggishness and interest rate cuts take effect, Chewy stock could become a strong contender, especially as people start spending more on their pets.
