Morgan Stanley increased its target price for Chewy Inc. to $53 per shares.
The company has a strong cost-management system and the potential to expand margins.
Morgan Stanley, despite maintaining an Overweight rating with a $33 target price for Chewy’s stock in the SMID ecommerce segment, has highlighted Chewy to be its number one pick.
Morgan Stanley’s optimistic forecast is based on Chewy’s ability to reach $750,000,000 or more EBITDA. It could also surpass $800,000,000 in fiscal 2025, and exceed $1 Billion in fiscal 2026.
The forecast depends on Chewy continuing its cost-streamlining and margin improvement efforts. A 50 basis point increase in gross margin is expected, as well as a 54 basis point leverage for SG&A and a 20 basis point reduction of marketing intensity.
Chewy Q2’s performance
Chewy’s Q2 performance in 2024 confirms this optimistic outlook.
Earnings per share increased to $0.24 from $0.15 in previous years.
The gross profit margin increased by 120 basis points to 29.5%, a 2.6% increase over the previous year.
The adjusted EBITDA jumped by 64 percent to $144.8 millions, a margin of 5.1% compared with 3.2% the previous year.
Sumit Singh, CEO of the company, highlighted its operational performance and commitment to customers, noting a net sale per active customer record figure $565. This was supported by 20,000,000 active customers.
Chewy, however, did not meet the consensus expectations despite its strong Q3 results. The company’s sales guidance, which was between $2.84 and $2.86 Billion for 2024, came in slightly below.
Sales guidance for the full year remains unchanged at between $11.6 and $11.8 billion.
Chewy customers’ active customer base plateauing
Despite Chewy’s notable improvement in terms of profitability and customer satisfaction, there are still challenges.
Concerns about the future of growth are raised by a plateau in active customers.
Chewy is facing intense competition, despite its efforts to increase spending per customer, and to broaden the product offering. This comes from bigger players, such as Amazon, who can use their extensive user base, and delivery abilities, to lower prices.
The valuation of Chewy is also a cause for concern. The stock is currently trading at 19,7x forward EV to EBITDA. This may be a reflection of a fully-valued position, given the growth prospects for the company.
The current stock price may limit the upside potential of Chewy unless the revenue growth in the next quarters accelerates.
CHWY valuation concerns
Chewy’s ability to grow through its new products and methods of monetization, like sponsored advertisements, is crucial for justifying the valuation.
When we move to the technical analysis it becomes clear that, while Chewy has solid fundamentals, its valuation and competition pressures could limit gains in near term.
Should you invest in CHWY now?
Chewy stock had been in a long-term downtrend between 2021 and 2023. This downtrend seems to have stopped in the second part of this year. Since their lows in April, the shares have increased by more than 75%.
TradingView
The stock is currently showing a bullish trend on the short and medium term charts.
Bulls, however, should still be cautious. After reaching a peak of $39.10 in June, the stock has quickly retraced following news about a discount stock buyback by BC Partners.
The stock has retraced again since the 28th of August, when it hit $30.10 after reporting its Q2 results.
Investors bullish about Chewy may want to consider a new long position, but only if it closes at or above $30.10 in the last daily chart.
Due to the bullish medium-term momentum, traders who are bearish must exercise caution.
They may, however, initiate a short position around the current level of $26.50 and a strict loss stop at $30.20.
The stock price could fall again below $20 if the bearish trend continues.
Morgan Stanley’s Bull case for Chewy shares can this post reach $50? This post may change as new information unfolds
This site is for entertainment only. Click here to read more
