Analysts discuss CHWY after Gill stake

Shares of online pet products retailer Chewy (NYSE:CHWY) fell sharply on Monday following the news that stock influencer Keith Gill, known as “Roaring Kitty,” has taken a stake in the company.

In a 13G filing with the Securities and Exchange Commission (SEC), Gill disclosed holding over 9 million shares of Chewy, amounting to a 6.6% stake in the company’s Class A shares.

CHWY stock closed 6.6% lower on Monday and was down an additional 1.6% in Tuesday’s premarket.

Commenting on Gill’s stake, analysts at William Blair said the move “is at potential risk of overshadowing a more fundamental recovery” they were anticipating for Chewy shares heading into the second half of 2024.

“In our view, while there is risk that Gill could command a wave of irrational investment based on past experience in GameStop (NYSE:GME), the inevitable collapse in that stock price could also limit unchecked exuberance,” analysts wrote.

“Regardless, it is worth planning for the potential of the stock to get divorced from fundamentals,” they added.

With the news of Keith Gill buying a stake in Chewy, Mizuho analysts hinted that investors may increasingly categorize Chewy alongside other "meme stocks" like GameStop and AMC Entertainment (NYSE:AMC).

However, from a fundamental perspective, Chewy is significantly different from GameStop or AMC, Mizuho stressed.

While day-to-day equity fluctuations are beyond management's control, the unpredictable and difficult-to-track news flow may lead to a narrower institutional investor base. This could result in growing hesitation to own shares and an increased likelihood of exiting current positions, the firm’s analysts noted.

“We are somewhat discouraged by these recent developments and remain Neutral, preferring to avoid any near-term and potentially fleeting excess volatility in the days and weeks ahead,” they wrote.

“We’re buyers of the pet food, not this level of volatility.”

Gill played a crucial role in the 2021 meme-stock surge and recently drew attention again after revealing his substantial position in GameStop stock and options on Reddit (NYSE:RDDT).

Interestingly, CEO and Chairman of GameStop, Ryan Cohen, is also a founder of Chewy. Recent speculation has suggested that Cohen might leverage GameStop's wealth from the stock surge to acquire a stake or all of Chewy.

Chewy, currently 70% owned by BC Partners, boasts a market cap of over $11 billion. Recently, BC Partners sold over $660 million in Chewy stock, with some of the sales occurring after Gill's cryptic social media posts last week.

While Chewy repurchased $500 million of the sold stock, the remaining shares remain unaccounted for, potentially bought by retail traders driven by Gill's speculation.

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