Wall Street initiations have arrived for pet product e-tailer Chewy (CHWY).
A series of firms initiated new research coverage on shares of Chewy on Tuesday, the day the quiet period expired for analysts at the banks that underwrote the company’s up-sized initial public offering in June. The majority of analysts initiated coverage with comparable Hold, Neutral, Equal-weight and Market perform ratings, indicating their belief that the stock would perform roughly in-line with the returns of the market at large.
Before Tuesday, WedBush Securities analyst Seth Basham was the only analyst at a major Wall Street firm to initiate coverage on the firm. He delivered a Neutral recommendation and $30 price target, which remains the lowest on the Street. WedBush did not participate in Chewy’s IPO.
Through Monday’s market close, Chewy’s stock jumped 56% above its IPO price of $22.00 per share as investors cheered the company’s growth prospects and narrowing net losses. However, some analysts noted that the company’s quick share price appreciation brought it around fair-value, leaving little room to run in the near-term.
Chewy has never reported a profit, but its net loss totaled $267.9 million for the 2018 fiscal year, down from $338.1 million for the year prior. Meanwhile, total sales jumped 67% to $3.5 billion for the 2018 fiscal year, eclipsing the annual sales of other newly public companies including Lyft (LYFT). However, this pace of growth was slower than the 134% top-line increase Chewy reported for the 2017 fiscal year.
Here’s what Wall Street analysts had to say in their new coverage of Chewy.
Barclays (Equal-weight, PT: $32.00)
Barclays analyst Deepak Mathivanan called Chewy “a strong brand in a compelling category that has several natural barriers for new entrants such as low [average selling prices] and gross margin.”
“What CHWY has done over the last five years in terms of scaling the business to over $3.5B in revenues is nothing short of extraordinary, in our view,” Mathivanan said.
“At ~2.3x 2020 revenues, however, shares are currently assigning little risk around continued low-profitability and potential pressure on unit economics as CHWY grows bigger, in addition to emerging competitive threats,” he added.
Morgan Stanley (Equal-weight, PT: $33.00)
Morgan Stanley analyst Brian Nowak said he liked Chewy’s “position as the online leader in the staple-like pet space,” adding that the company is “the online pet leader and we don’t see that changing.” However, he suggested waiting for a “better entry point” for investors to jump into the stock versus current levels.
“While we are bullish on CHWY’s industry and business model, we see current valuation as being fair, with the market valuing CHWY at 2.4X times our ‘20 revenue,” Nowak said.
He added that the company should trade at a premium versus other e-commerce platforms like Wayfair (W) and Amazon (AMZN), before it broke out Amazon Web Services, due to factors including its operations in the “growing, economically resilient, and recurring pet product category,” and capture of “a large recurring revenue base,” with 68% of its fiscal fourth-quarter 2018 revenue coming from Autoship.
Nomura (Neutral, PT: $36.00)
Nomura analyst Mark Kelley said Chewy’s current valuation leaves him “on the sidelines.” He said he liked “the long-term prospects for the industry and for Chewy” but believed “the market is pricing shares appropriately at current levels.”
“The next leg of top-line growth should be driven by (1) continued customer acquisition, as U.S. pet ownership grows (85 million households in the U.S. had a pet in 2016), paired with a further shift to online channels from physical stores; (2) growing sales from existing customers; (3) expansion of Chewy’s portfolio of private brands; (4) growth within (or entry into) complementary products and services such as healthcare and services; and (5) international expansion over the long-term,” Kelley said.
RBC Capital Markets (Sector Perform, PT: $37.00)
RBC analyst Mark Mahaney said Chewy’s current valuation “is reasonably balanced between risk and reward,” and has “developed a differentiated model that offers the convenience and selection of an e-commerce platform AND the customer-centric focus of a pet specialty store.”
Downside risks to the investment thesis, however, include unproven profitability, competition from traditional brick-and-mortar stores and other e-commerce platforms, and a lack of international presence, Mahaney noted.
Bailey the rescue dog poses for a photo in a photo booth ahead of the Chewy Inc. IPO at the New York Stock Exchange (NYSE) in New York City, U.S., June 14, 2019. REUTERS/Andrew Kelly
Raymond James (Market perform, PT: NM)
The company’s shares are “fairly valued at 2.4x 2020 EV/Revenue and 10.3x 2020 EV/GP vs. peer group at 3.2x 2020 EV/Revenue and 6.4x 2020 EV/GP,” according to Raymond James analyst Aaron Kessler.
“We believe Chewy shares have several positive fundamental attributes, including 1) large pet care market shifting online; 2) customer-centric approach including excellent customer service and wide product selection at competitive prices; 3) predictable customer economics and increasing sales per customer; 4) our expectations for ~20% long-term revenue growth; 5) our expectation for 5-10% long term EBITDA margin expansion (vs. -7% in 2018) driven by improved gross margins and scale efficiencies,” Kessler said.
J.P. Morgan (Overweight, PT: $42.00)
JPMorgan’s Doug Anmuth praised Chewy’s capture of about 50% of the U.S. online pet product market share, calling the pet care industry “a growing and highly attractive category early in the shift online.”
“Chewy has rapidly increased net sales from $204M in FY14 to $3.5B in FY18 (+104% CAGR), and we expect strong growth to continue based on: 1) 11M+ active customers spending ~$340+/year; 2) 45k+ products from 1.6k+ brands; 3) subscription-like revenue stream with auto-ship customers ~2/3 of net sales; 4) high-touch customer service—25% of orders have an interaction; 5) and 3rd largest U.S. fulfillment network, reaching 99% of customers in 2 days and 80% overnight,” Anmuth said.
William Blair (Outperform, PT: NM)
Chewy is “well-positioned with a customer-centric model to drive disproportionate share in the pet supplies industry as migration online accelerates,” William Blair analyst Dylan Carden wrote in a note.
“Continued online migration, customer retention, and increased spending are the largest growth drivers for the company, while longer term we look for private label, pet pharmaceuticals, services and potentially international expansion to open additional growth avenues.”
