This Pet Stock Is Down 40% This Year Despite Growing Free Cash Flow by 24% in 2025

The market has sent Chewy (NYSE: CHWY) to the doghouse. The stock is down more than 40% year to date, and now trades below its 2019 IPO price. Yet, Chewy continues to report steady growth in active customers, spending per customer, and free cash flow, supported by a subscription model that now accounts for the majority of sales.

The decline reflects ongoing pressure on discretionary pet spending, intense price competition from rivals like Amazon, and concerns that agentic AI could disrupt its ad business.

Image source: Getty Images.

A subscription model built for stability

Chewy's advantage lies in its Autoship program. This subscription service for pet food, treats, and medications has become the core of the business. In fiscal 2025, Autoship customer sales accounted for 83% of total revenue, up from 76% just two years earlier.

The service automates spending on necessities like food and medicine, providing Chewy with a predictable, recurring revenue stream. Sales from these subscribers grew 12% last year, outpacing the company's total revenue growth of 6%.

Still, the company faces real issues ahead. Chewy is a low-margin retailer in a mature industry, and it's feeling the pressure from price-sensitive consumers. Competitors like Amazon and Walmart are gaining share, and a potential price war in pet supplies would squeeze Chewy's margins further.

The market is also worried about the threat from AI-driven shopping agents that could bypass Chewy's storefront and reduce its high-margin advertising revenue. Management argues that more than 85% of its sales are from products with manufacturer-set prices and that its Autoship program is structurally protected, but it remains a risk for investors to watch.

The path to higher profitability

Chewy is also moving from the digital shelf to the physical examination room through the build-out of its own Chewy Vet Care clinics and the recent acquisition of Modern Animal, announced last month. The deal adds 29 physical clinic locations, bringing the total to 47, and is expected to be accretive to earnings per share within a year.

While the company's total revenue growth has moderated to the single digits, its profitability is improving. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin has improved from 3.3% in fiscal 2023 to 5.7% in 2025.

Management is guiding for another 100 basis points of margin expansion this year, with a long-term target of at least 10%. This growth is supported by operating leverage, the expansion of higher-margin private brands, and more than $50 million in expected annual savings from AI-driven efficiencies by 2027.

The balance sheet provides financial flexibility. Chewy has roughly $880 million in net cash and no debt, allowing it to invest in growth such as its vet clinic initiatives. Last year, the company grew free cash flow by 24% to $562 million. At its current valuation, the stock trades for just 12 times this year's earnings estimates, a compelling price for a business with this level of recurring revenue and potential pathway for margin expansion.

Bryan White has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Chewy, and Walmart. The Motley Fool has a disclosure policy.