3 Reasons Chewy Stock Fits Peter Lynch's Blueprint for a 10-Bagger Stock

Peter Lynch was one of the most successful investors in his day. Between 1977 and 1990, his Magellan fund achieved a 29.2% average annual return.

Much of that success came from his formula of picking 10-bagger stocks, or stocks that could turn a $1,000 into $10,000 over time. Many of these successes occurred in retail stocks, as Lynch picked winners such as Dunkin' and Taco Bell before Yum! Brands acquired it.

Naturally, today's investors want to apply his criteria to find future 10-baggers. Given Lynch's success with finding promising retail stocks, Chewy (NYSE: CHWY) may be another name that fits into Lynch's criteria. Here are three reasons to explain why.

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1. Qualitative characteristics

Chewy is a name that grew into a potential Peter Lynch stock. One way is by being "boring." E-commerce names were more exciting during the COVID-19 pandemic, but with the return of online shopping, such enterprises did not appear as appealing as Amazon.

Fortunately, Chewy has stood out by offering competitive advantages in the pet supply and service businesses. For one, it offers a higher level of customer service than Amazon, with representatives available 24/7, sending handwritten cards, and delivering flowers when pets pass away. With that level of care, customers often sign up for its autoship program, which tends to boost sales levels.

Additionally, Chewy offers telehealth services for pets and has opened physical vet clinics in select areas. These offerings amount to a pet services ecosystem that its peers might struggle to copy.

2. Continued financial growth

Thanks to that ecosystem, Chewy grew its sales even as customers returned to offline shopping options when the pandemic ended, and it has continued to do so to this day.

Admittedly, the 7% net sales growth in the first quarter of fiscal 2026 (ended May 3) and the 6% increase in fiscal 2025 are not the outsize results that growth investors often seek.

Fortunately, Chewy increased net income by 51% in fiscal Q1 and would have grown profits by 47% in fiscal 2025 had it not been for a one-time $241 million income tax benefit in the previous fiscal year. That more than meets the 20%-plus growth Lynch sought in a company.

3. Room for stock price growth

Despite financial improvements, Chewy's stock fell along with that of most online sellers as the pandemic came to an end. Amid that decline, investors seemed to forget this stock. As a result, it trades at a discount of more than 80% from its all-time high during the pandemic, meaning a recovery to that peak would take it halfway to a 10-bagger return.

That pullback also took its market cap to $9.4 billion, making it a mid-cap stock. Smaller companies can grow at higher percentages more easily than larger companies. Moreover, 10x growth would take its market cap to $94 billion, a level far below that of many prominent retailers.

Favorable valuations should also help that growth. Even though the aforementioned income tax benefit took its P/E ratio to 39, a forward P/E of 15 arguably makes the stock inexpensive. Also, its price-to-earnings-to-growth (PEG) ratio has fallen to 0.1. Since Lynch looked for companies with PEG ratios below 1.0, Chewy appears to fit his valuation requirements.

Finally, it could achieve 10x growth or more by applying this growth formula in other countries. It has already begun to expand in Canada by targeting the Toronto area.

Indeed, cultural differences have often complicated international growth for many retailers. Still, considering that Petco has succeeded in Canada, Mexico, and Chile, Chewy could also prosper outside of the U.S.

Chewy as a Peter Lynch investment

Ultimately, Chewy could become a 10-bagger as it fits many of Lynch's criteria.

Whether it rebounds in the next year or not, Chewy stands out by offering a level of customer service that more transactional e-commerce companies do not. That business has anchored other health-related services, making Chewy more of a pet-care ecosystem.

Additionally, Chewy has grown revenue across a variety of business conditions, resulting in net income growth that meets Lynch's 20% minimum growth rate.

Finally, with a smaller market cap, a lower PEG ratio that Lynch tended to seek in his active years, and prospects for international expansion, Chewy stock holds the potential for 10x returns over the long term.

Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and Chewy. The Motley Fool recommends Yum! Brands. The Motley Fool has a disclosure policy.