Time To Buy The Dip In Chewy Stock?

·3 min read

The global COVID-19 crisis has forced millions of people to stay at home, leading to a boom in online orders for e-commerce companies, including Chewy (CHWY), which has seen its stock soaring more than three-fold over the past year.

However, 2020 stock market winners are starting to pull back. It’s hard to see the current downward trend reversing in the near-term, whether rising interest rates are to blame, or sector rotation out of pandemic plays and into recovery stocks.

With so much of its potential already priced into CHWY stock, even if the company reports better-than-expected growth, investors may be unwilling to stretch its current valuation further.

So, what does that mean for investors today? It’s too early to start “fighting the trend.” Shares may look as if they are starting to stabilize, but we could see a continued pullback from here in the coming months.

Why Investors Are Taking Profits On CHWY Stock

As the pandemic continues to accelerate the transition of retail spending to e-commerce, Chewy is well-positioned to take advantage of this trend. Before the recent pullback, shares surged as analysts raised their price targets on better-than-expected holiday sales results.

However, in recent weeks investor sentiment has started to cool and while the direction for the underlying business is sustainable, the downward bias for CHWY might make it difficult to regain its upward momentum in the near-term. Investors are realizing that now might be a good time to start taking some profits.

With the stock seemingly stabilizing around $100 per share, is it now time to “buy the dip”?

A bounce back to prior highs isn’t out of the question, but with valuation concerns now more top of mind than before, we may start seeing more downward pressure on the stock.

Weighing Growth Versus Price

As it stands, CHWY trades at a price-to-sales (P/S) ratio of around 5.9x. This is a rich valuation, even among comparable e-commerce stocks, which is not necessarily a bad thing in isolation, as long as there’s enough growth to back it up.

However, it’s questionable whether this is the case for CHWY. With the company still posting negative earnings, it’s hard to use P/E ratios to assess whether shares have gotten ahead of themselves or are accurately priced relative to growth.

Given the expected slowdown in sales growth between FY 2021 (ending Jan. 2021) and FY 2022 (ending Jan. 2022), the current sales multiple assigned to this stock may not be sustainable.

With interest rates rising, it’s become harder to justify sky-high forward multiples and valuation contraction now appears highly likely. The share price is not expected to fall back tremendously from here, yet, as investors reassess their valuation, a move towards the lower end of analysts’ price ranges could be just around the corner.

What Analysts Are Saying About CHWY

According to TipRanks’ analyst consensus, CHWY is currently rated a Moderate Buy based on 12 recommendations which include 8 Buys, 3 Holds and 1 Sell.

The average analyst price target of $96.90 per share implies around 2% downside potential from current prices. Price targets range from a high of $121 per share to a low of $75 per share. (See Chewy stock analysis on TipRanks)

Bottom Line: CHWY Could Slide Back Down To Double-Digit Prices

The move from in-store to online purchases won’t disappear once the pandemic ends. But while the fundamentals may remain solid for Chewy and similar plays, that doesn’t mean their respective stock prices will continue to climb.

As investors move out of 2020 winners and into stocks in sectors set to bounce back post-COVID (for example, travel stocks), CHWY could continue to slide back down to double digit price levels.

Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.