Chewy’s (NYSE: CHWY) stock price has struggled since the peaks set in 2020 because it could not sustain the wicked-hot growth pace driven by pandemic spending and stimulus measures. Today’s takeaway is that the market for Chewy stock has normalized, and its business turned a corner in the first half of the year, setting it up to complete a technical reversal that will lead to a sustained rally.

The critical takeaway is that Chewy is executing well, improving the quality of its revenue and earnings. At the same time, the customer count returns to growth, and the industry forecast includes a multi-year acceleration in spending. 

Execution Drives Engagement, Engagement Produces Growth for Chewy

Chewy’s Q2 results aligned with the consensus, but critical details show customer count and revenue per customer growing sequentially, with revenue per client up YoY, setting a new record. Revenue was as expected; the margin and outlook for sustainable growth lift market sentiment. The company widened its margin at all levels, GAAP and adjusted, which produced a significant double-digit improvement in EBITA, net margin, and earnings, which are expected to stick. 

Autoship was another area of strength. The number of autoship clients fell compared to last year but only marginally, but a sequential gain and improvement in revenue offset it. Autoship sales, which equate to recurring revenue, grew by 5.8% and gained 230 bps in contribution impact. Autoship is now 78% of the net revenue and provides clear visibility for future revenue and earnings. 

Chewy does not give specific guidance but is optimistic about the future. Industry trends suggest a trough in growth was reached this year and will begin to accelerate next. The pet care industry is tracking for low-single-digit growth this year, which is expected to accelerate to 5% next year and reach upward of 7% by the end of the decade. 

Undervalued, Chewy Stock Is Heading Higher

Chewy stock is trading at a premium to the broad market with a P/E of 27.5x this year’s earnings, but the market is undervaluing the growth outlook. Earnings are forecast to grow by 15% in 2024 and to accelerate over the following years, putting the valuation in the low teens by 2030. In that time, Chewy’s cash-flow-positive business will allow it to continue investing in growth while improving shareholder value, which are tailwinds for the stock price demanding a higher multiple. 

Chewy’s Q2 resulted in a slight decrease in shareholder equity, but no red flags were raised. Increased cash, flat liabilities, and low leverage offset a slight asset decline. Total obligations run at 5.3x equity and 0.85x assets, with long-term obligations at only 0.06x cash and 0.09x equity, leaving the company in solid shape to pursue its strategies. Strategies pursued in 2024 include increasing membership in its rewards program, expanding reach, engaging with clients through a pet-wellness app and veterinary services, expanding into Canada, and improving the product line. 

Chewy Analysts Bring Its Stock Back into Focus

Chewy analysts have steadfastly supported the company, but price target revisions weighed on the market in the first half of the year, a trend that changed in the first part of Q3. Analysts have begun to lift their price targets again, signaling a floor for the action coinciding with critical support targets. Those targets range from $25 to $27.50, providing technical support for the stock price. 

The consensus estimate is down 35% from last year but hit bottom over the summer and is now tracking higher. The only bad news is that the consensus is below the current stock price, but investors needn’t worry. Four of five or 80% of the freshest targets range from $30 to $35, suggesting a 5% to 20% upside lie ahead. Investors can expect upward revisions to continue because of the strengths shown in Q2 and the growth outlook.