Stock Market

Online pet destination Chewy (NYSE:CHWY) smashed first-quarter numbers by a wide margin, but CHWY stock still fell.

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This is fine.

Chewy’s guided Q2 and full-year revenues fell relatively in line, which means Q2 through Q4 numbers are expected to come in below expectations.

The expectations already priced in a slowdown. So basically, management is saying that it’s business will slow down more than the anticipated throughout 2021.

This is not inherently good, and it’s why shares are falling. Chewy looks good on paper now, but the company is aware of the challenge it faces in the near future. As society reopens, people will put online shopping on pause and enjoy the fresh air.

But these shoppers will be back in due time.

The good news is that the negative sentiment surrounding Chewy’s future expectations are just noise.

We’re going from a year where everyone, by necessity, shopped online to the quite the opposite — an unprecedented demand to do anything and everything outside, including shopping. Even movie theaters, which were only recently on the brink of disaster, could be making a comeback.

Also playing heavily into Chewy’s pandemic success was the unprecedented adoption rate of pets. People were rescuing pets from shelters in such great numbers that some shelters were running out of animals. Naturally, the people adopting these pets will spend money on food, bedding, accessories and so on for their newfound family members. All of this necessarily-online spending helped prop Chewy higher than it maybe would have otherwise been.

The Slowdown Is Near-term

But come 2022, things will normalize.

Then the secular trend favoring online shopping will continue.

Long-term growth drivers remain in-tact for Chewy’s pet e-commerce company. Pet spending is on the rise, and more Americans than ever treat their pets like children.

And Chewy has dominant market positioning. They’re Amazon for pets in the making.

We think the valuation of CHWY stock looks attractive on the dip. Assuming a durable 20%-plus revenue and around 10% EBIDTA margins, you’re talking a stock that could easily double in the next few years, if not more?

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On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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