Morgan Stanley has revised its bull case valuation for Chewy Inc. (NYSE: CHWY), increasing the target to $53 per share.
This upward adjustment reflects the company’s robust cost management and potential for margin expansion.
Despite maintaining its Overweight rating and a target price of $33, Morgan Stanley has underscored Chewy as its top pick in the small-to-mid-cap (SMID) e-commerce sector.
Morgan Stanley’s optimistic projection is rooted in Chewy’s potential to achieve $750 million or more in EBITDA, with the possibility of surpassing $800 million in fiscal year 2025 and exceeding $1 billion in fiscal year 2026.
This forecast is contingent on Chewy’s continued cost-streamlining efforts and margin improvements, with anticipated gross margin expansion of 50 basis points, SG&A leverage of 54 basis points, and a reduction in marketing intensity by 20 basis points.
Chewy’s Q2 performance
Chewy’s performance for Q2 2024 supports this positive outlook.
The company reported earnings of $0.24 per share, an increase from $0.15 per share in the previous year.
Revenue rose by 2.6% year-over-year to $2.86 billion, and the gross profit margin expanded by 120 basis points to 29.5%.
Adjusted EBITDA surged by 64% to $144.8 million, translating to a 5.1% margin compared to 3.2% in the prior year.
CEO Sumit Singh praised the company’s operational execution and customer engagement, highlighting a record net sales per active customer figure of $565, supported by 20 million active customers.
However, despite these strong results, Chewy’s guidance for Q3 2024 sales, projected between $2.84 billion and $2.86 billion, fell slightly short of consensus estimates.
The company’s full-year sales guidance remains steady at $11.6 billion to $11.8 billion.
Chewy’s active customers plateauing
While Chewy has shown notable improvements in profitability and customer engagement, challenges persist.
The company’s active customer base has plateaued, raising concerns about future growth.
Despite efforts to enhance spending per customer and broaden product offerings, Chewy faces intense competition from larger players like Amazon, which can leverage its extensive user base and delivery capabilities to offer lower prices.
Chewy’s valuation also raises concerns. Currently trading at 19.7x forward EV-to-EBITDA, the stock’s price may reflect a fully valued position given the company’s growth prospects.
Although Chewy has improved its profitability and margins, the current valuation might restrict the stock’s upside potential unless revenue growth accelerates in the coming quarters.
CHWY’s valuation concerns
Chewy’s strategy to drive growth through new product offerings and monetization methods, such as sponsored ads, will be crucial in justifying its valuation.
As we shift to technical analysis, it’s evident that while Chewy’s fundamentals provide a solid foundation, the stock’s valuation and competitive pressures may limit near-term gains.
Medium-term bullish, but should you buy CHWY?
Chewy’s stock was in an extended downtrend from 2021 to 2023. However, this downtrend appears to have ended in the second half of this year. The shares have appreciated more than 75% from their April lows.
Source: TradingView
Currently, the stock shows bullish momentum on both short-term and medium-term charts.
Despite this, bulls should remain cautious. The stock has retraced swiftly after reaching a high of $39.10 on June 27, following news of a discounted stock buyback from BC Partners.
It has again retraced since August 28 after hitting $30.10 when the company reported its Q2 numbers.
Given this, investors bullish on Chewy should consider initiating a fresh long position only if the stock closes above the recent high of $30.10 on the daily chart.
Traders who are bearish on the stock must also exercise caution due to the medium-term bullish momentum.
However, they may initiate a small short position at current levels around $26.50 with a strict stop loss at $30.20.
If the longer-term bearish momentum prevails the stock could again fall below $20 in the coming weeks.
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