After making the choice to put money into stocks, there are various routes you can follow based on factors like how long you plan to invest, how much risk you are comfortable with, and what kind of returns you are aiming for. One option in this decision-making process is to engage in stock investment. Shares that are classified as either “value” or “growth” are commonly referred to as value or growth stocks. .
The first strategy aims to make money by buying stocks at a lower price relative to specific valuation measures. On the other hand, the second strategy involves investing in companies that are experiencing rapid revenue growth, even if they have not yet become profitable.
The stock of Chewy ( CHWY 0.46% ) falls into the growth sector. Nevertheless, its stocks have decreased by 32% in the last year, while there has been a 23% increase for the Index of Russell 3000 Growth Additionally, it seems to be attractive to investors who focus on value.
Credit: Getty Images.
Contents
Beloved by the pandemic
Chewy is an online retailer that offers pet food, accessories, and medications. The company experienced a boost in sales at the beginning of the pandemic as pet adoptions increased while people were confined to their homes. With limited access to physical stores, many customers relied on Chewy’s website to fulfill their pets’ requirements.
Chewy’s sales increased to $8.9 billion by the end of fiscal year 2021, which concluded on January 30, 2022, compared to $4.9 billion at the end of fiscal year 2019.
Investors witnessed a significant increase in the company’s share price due to ongoing strong growth. The stock experienced a 210% surge in 2021. However, it seemed to have overvalued itself as individuals resumed their usual activities.
A promising business prospect
Luckily, Chewy has a successful and expanding business. By concentrating solely on online sales, it provides pet owners with ease and convenience.
According to Packaged Facts, the pet market in the United States experienced an 8% growth last year, reaching approximately $145 billion. The research also suggests that e-commerce accounted for 37% of the market, a significant increase from 20% in 2018, which benefits Chewy due to its online-exclusive operations.
It functions in an industry that is resilient to economic downturns because individuals tend to prioritize spending on their pets, considering them as important family members. This is particularly beneficial given the rising concerns about an economic decline. For example, the pace of job creation has been decreasing, with only 114,000 jobs added in the United States in July.
In general, consumer spending in the United States declined over the Great Recession period from 2008 to 2010. However, during that same timeframe, spending on pets rose by 12%.
Concentrating on customers who are faithful to the brand
The number of Chewy’s engaged customers has been decreasing recently. In fiscal year 2020, the active customer base grew by 5.7 million to 19.2 million, then increased to 20.7 million in the subsequent year. However, it fell below 20 million by April 28, 2024.
I am not worried because the customers that stayed with the company are spending more. In the most recent quarter, the average sales from active customers were $562, showing a 9.6% increase compared to last year. Additionally, sales from the subscription Autoship program are also increasing, reaching $2.2 billion with a growth rate of 6.4%.
Chewy has started to make a profit as well. In the previous year, it made $39.6 million, and in the first quarter of this year, the net income was $66.9 million.
The valuation
The assessment, determined by the The price-to-sales ratio (P/S) The price-to-sales ratio of the stock has decreased. Currently, the stock has a P/S ratio of 0.9, which is much lower than the over 6 ratio it had reached in early 2021. In the past five years, the median P/S ratio for the shares was 2.1.
An expanding, lucrative business that is resistant to economic downturns, along with an appealing price, presents an opportunity for investors looking to hold onto their investments for the long term.
