Has Chewy (CHWY) Stock Been Good For Investors?

Chewy (NYSE: CHWY) is a leading online seller of pet products that experienced weakening revenue growth over the past few years. As a result, the stock is down about 54% over the last five years and down slightly over the past 12 months. It significantly underperformed the S&P 500, which has returned 87% since November 2020.

Still, Chewy is a profitable online retailer that's expanding its revenue opportunities into high-margin services. Its efforts could make the stock an attractive value right now. Here's how Chewy is positioning for profitable growth, and what that means for the stock's return prospects.

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Repeat customers comprise most of Chewy's revenue

Chewy was regularly growing revenue at double-digit percentage rates until 2023. Increasing competition from large retailers like Walmart and Amazon may be making it more challenging for Chewy to maintain its higher growth. Still, its exclusive focus on pet products is a key differentiator from large retailers.

Chewy benefits from tremendous customer loyalty. Revenue has shown signs of accelerating back to double-digit rates over the past year, with the top line increasing by 9% year over year in the recent quarter. A key advantage for Chewy is that over 80% of its sales are driven by its Autoship program, which allows customers to have their preferred pet food shipped to their door every month.

Revenue is expected to increase at a compound annual growth rate (CAGR) of 8% over the next five years. However, this projection may underestimate its true growth potential. Consumers spend a significant amount of money on their furry family members. The industry is valued at $157 billion, according to the American Pet Products Association, and has been experiencing steady growth for several years. There is ample room for multiple companies to thrive in this market. Chewy's focus on pets and wide selection place it in a solid competitive position.

However, what could really drive the stock higher in the years to come is margin expansion. Chewy is expanding into several services that can drive higher gross margins, such as its Chewy+ membership, pet healthcare, and private label products, while also allowing other brands to advertise on its website with Chewy Ads. The growth across these new revenue streams could drive higher earnings, which serves as a catalyst for the stock.

Why the stock price could double

Analysts expect Chewy's operating margin to increase from 0.9% last year to 4.6% by the end of fiscal 2030. This is likely to translate to annualized earnings growth of 18%.

Obviously, Chewy isn't immune to weak consumer spending and economic pressure, but the stock's recent decline already reflects these risks. With the stock trading at a reasonable forward (1-year) price-to-earnings multiple of 22, the stock offers attractive upside potential. Assuming the stock meets analysts' earnings expectations and continues to trade at the same valuation, investors could see it double in value over the next five years.

John Ballard has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Chewy, and Walmart. The Motley Fool has a disclosure policy.