Why Chewy Stock Got Mashed in May

There were some tasty treats for investors to enjoy on the stock market last month, but pet goods specialist Chewy (NYSE: CHWY) wasn't one of them. Cautious remarks from company CEO Sumit Singh, combined with a set of analyst price target cuts, drained investor enthusiasm for the company's equity. It exited May down by more than 11%.

Doubts about the consumer

In mid-month, Singh gave a fireside chat about Chewy's business at the J.P. Morgan 54th Annual Global Technology, Media, and Communications Conference. While he pointed out numerous positives underlying the company's business -- such as its estimated total addressable market of roughly $160 billion -- he added that consumers were feeling the pressure of a challenged economy.

Image source: Getty Images.

He stated that although the pet food and accessories industry "remains resilient, it is not immune to the macro changes that we are seeing. In the last couple of months, we are continuing to see and interpret the consumer as being more stretched than we were when we entered the year. There's no shortage of data points that supports that."

The following week, and on the same day, two analysts from prominent banks reduced their Chewy price targets. Morgan Stanley's Lauren Schenk reduced hers to $43 per share from $49, while her peer, Trevor Young of Barclays, felt compelled to trim his to $40 per share from $48. Despite the slices, both prognosticators maintained their overweight (i.e., buy) recommendations on the stock.

According to reports, Schenk based her change on a less favorable macroeconomic environment; this led her to reduce estimates for the company. She wrote that she also expects management to trim the high end of its revenue guidance for the full fiscal year. As for the company's earnings before interest, taxes, depreciation, and amortization (EBITDA) outlook, Schenk does not expect it to be raised.

As for Young, he believes that the market has rather lofty expectations for Chewy's growth. At the moment, however, the stock is pricing in negative news items.

Beaten-down bargain

Chewy not only saw a notable dip in its share price across May, but at one point it even hit its all-time low (on the 20th, to be precise). Whenever a beaten-down stock reaches a trough, it's natural to wonder whether a bounce is about to occur. That hasn't really happened yet -- as of this writing, Chewy has added less than $1 per share to its price -- but it's a sign that investors at least have some guarded optimism.

To me, Chewy hasn't deserved the drubbing that it's taken. I think its once-lofty valuations have fallen to more realistic levels, and it still has potential for meaningful growth; I'm particularly impressed by the take-up of its Autoship program. I'd consider this as a bargain stock buy these days.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chewy. The Motley Fool recommends Barclays Plc. The Motley Fool has a disclosure policy.