Chewy Reports Soon. Here's Why I'd Buy Before the Number Drops.

Chewy (NYSE: CHWY) stock has been on a downward trend over the past year and is currently hovering around a 52-week low.

The stock of the online pet retailer is down about 35% year to date and 55% over the past 12 months, trading at around $21.50 per share.

With its fiscal first-quarter earnings coming up on June 10, now may be a good time to add some dirt-cheap shares of Chewy.

Image source: Getty Images.

Dirt cheap valuation

A big reason Chewy has struggled is that the stock was overvalued. Late last fall, it was trading at 95 times earnings and 25 times forward earnings, and investors pulled back, given expected economic headwinds. The expectation was that rising inflation and a weak job market would cause people to curb their spending on pet supplies to the extent that it would be difficult for Chewy stock to sustain the high multiples.

The stock price has plummeted in recent months, as has the valuation.

Chewy stock is now trading at 41 times earnings and a far more reasonable 14 times forward earnings. Further, its five-year PEG ratio is a dirt cheap 0.37. Anything below 1 means the stock is undervalued relative to its long-term earnings expectations.

Strong growth expected

Chewy's sell-off has largely been a function of the high valuation and investor concerns about the economy. In reality, Chewy's growth numbers have been solid. In the fiscal fourth quarter, revenue grew 0.5% and met expectations, and earnings crushed analyst estimates.

Autoship sales, an important metric for Chewy, rose about 5% year over year to $2.7 billion, representing 84% of sales, up from 80.6% a year ago this quarter. In addition, its gross margin expanded by 90 basis points year over year in the quarter to 29.4%.

The stock price shot up about 15% after the earnings release on the strong results and robust outlook.

For the fiscal first quarter, the results of which are expected on June 10, Chewy anticipates net sales of between $3.33 billion and $3.36 billion and adjusted earnings per share (EPS) of $0.40 to $0.45 per share. Sales would be up about 3% from Q4, while earnings would be up about 57% at the midpoint from $0.27 adjusted EPS in Q4.

For the full fiscal year, Chewy targets $13.6 billion to $13.75 billion in net sales -- a roughly 9% year-over-year jump, outpacing last year's 6% increase.

Why buy now?

Chewy stock got a sizable bump after it released its fourth-quarter earnings and outlook, based on the better-than-expected performance and robust guidance.

This quarter, the numbers are anticipated to be even stronger, so if Chewy meets or exceeds the estimates, it should get a nice pop. And over the past four quarters, Chewy has consistently beaten expectations.

Also, Chewy plans to acquire Modern Animal to expand its veterinary care platform. That could also provide a boost when more details are likely announced on June 10.

Chewy is already the dominant player in its space, and with its financials in excellent shape with rising free cash flow and relatively little debt, it is in prime position to invest in its growth.

At this near-rock-bottom valuation, Chewy is just too good to pass up, with earnings as a near-term catalyst.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chewy. The Motley Fool has a disclosure policy.