Chewy Inc., the online pet supplies retailer, has the potential to see its stock price nearly double over the next year, according to Morgan Stanley, as the company implements measures aimed at boosting profitability.
Nathan Feather, an analyst at Morgan Stanley, has raised his bull-case price target for Chewy shares to $53 from $49, citing strong earnings potential and the company’s strategic cost management. Feather views Chewy as a top pick among small- and mid-cap e-commerce stocks due to its compelling margin expansion prospects.
“Chewy’s forward margin trajectory remains highly attractive and is still underestimated by many,” Feather wrote in a client note. He predicts the company could realistically generate $750 million or more in EBITDA by the fiscal year ending January 2026—12% higher than the average analyst projection.
Despite a 50% rally in Chewy’s stock over the past six months, shares are still trading well below their peak from February 2021. Feather’s profit outlook is supported by Chewy’s disciplined cost controls and consistent EBITDA outperformance this year. He expects further gross margin improvements in 2024, driven by the growth of Chewy’s sponsored ads business, sales of higher-margin products, and greater operational efficiencies from automation, which could reduce fulfillment costs.
Feather also noted that the rising EBITDA estimates make Chewy’s valuation more appealing, even as its stock has gained. “Valuation has become a key topic of conversation regarding Chewy, especially following the recent rally in its shares,” Feather added.
The stock experienced some volatility earlier this year when Keith Gill, known online as “Roaring Kitty,” disclosed a stake in Chewy. The stock dipped momentarily last Friday after his X (formerly Twitter) account posted an image featuring a cartoon dog. Despite this, Chewy’s shares were up nearly 2% in New York trading, hovering around $27.
Feather remains optimistic but cautions that Chewy’s performance is not without risks. He highlighted uncertainties in the broader pet supply market, which could compel Chewy to ramp up its investments, potentially impacting profitability. Nonetheless, Feather reaffirmed his “overweight” rating for the stock and maintained a base-case price target of $33. In a more bearish scenario, where customer growth and sales face headwinds due to increasing competition, Feather sees the stock potentially falling to $11.
Chewy has garnered significant attention from Wall Street analysts, with 14 “buy” ratings, 12 “hold” ratings, and two “sell” ratings, according to data compiled by Bloomberg. The average price target implies a 16% upside potential for the stock over the next 12 months.
Analysis: For investors, the opportunity in Chewy lies in the company’s ability to enhance profitability through disciplined cost management, margin expansion, and operational improvements. With a strong path to EBITDA growth, Chewy offers a favorable risk-reward profile, especially given its growing e-commerce footprint and focus on higher-margin products.
However, potential risks, such as increased competition and a slowdown in pet spending, could present challenges. Investors should weigh the potential for Chewy to achieve its bullish projections against these uncertainties, but the long-term upside makes it an attractive proposition for those with a higher risk tolerance.
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