Are Investors Undervaluing Chewy, Inc. (NYSE:CHWY) By 40%?

Chewy, Inc. (NYSE:CHWY), the leading online retailer of pet products, has seen its stock price surge by nearly 100% in the past year, reaching an all-time high of $37.01 as of January 19, 2025. Despite this impressive performance, some analysts and investors argue that the stock may still be undervalued by as much as 40%. This article explores the potential undervaluation of Chewy's stock and the factors that could drive its growth in the coming years.



One of the primary reasons investors may believe Chewy is undervalued is its strong earnings growth. In 2023, Chewy's earnings grew by 925.29% year-over-year (YoY), reaching $39.58 million. While this growth rate is impressive, it is essential to consider the company's earnings history and the sustainability of its growth. In 2022, Chewy's earnings grew by 23.83% YoY, indicating that the company's earnings growth may not be as consistent as some investors might hope.

Another factor that could contribute to Chewy's undervaluation is its valuation metrics. Chewy's Price-to-Earnings (P/E) ratio is 40.25, which is higher than the industry average of 16.5x. However, this high P/E ratio may be justified by Chewy's strong earnings growth and the potential for continued expansion in the pet industry. Additionally, Chewy's Enterprise Value (EV) to Sales ratio is 1.33, which is lower than the industry average of 2.1x. This suggests that Chewy's stock price may be relatively low compared to its peers.

Chewy's strong financial performance and growth prospects have led some analysts to upgrade their ratings for the stock. For example, Mizuho Securities upgraded Chewy to "outperform" in December 2024, citing the company's strong position in the online pet retail market and its potential for continued growth. Additionally, Wolfe Research analyst Shweta Khajuria included Chewy in her list of top stock picks for 2025, highlighting the company's strong brand and its ability to capitalize on the growing demand for pet products.



Despite the positive outlook from some analysts, it is essential to consider the risks and challenges facing Chewy. The pet industry is highly competitive, with numerous brick-and-mortar and online retailers vying for market share. Additionally, Chewy's reliance on online sales may make it more vulnerable to changes in consumer behavior and preferences. Furthermore, Chewy's high debt levels, with a Debt-to-Equity ratio of 2.43, could pose a risk to the company's financial health if it struggles to generate sufficient cash flow to service its debt obligations.

In conclusion, while Chewy's strong earnings growth and valuation metrics may suggest that the stock is undervalued, investors should be cautious and consider the risks and challenges facing the company. The pet industry is highly competitive, and Chewy's reliance on online sales may make it more vulnerable to changes in consumer behavior. Additionally, Chewy's high debt levels could pose a risk to the company's financial health. As always, investors should conduct their due diligence and consult with a financial advisor before making any investment decisions.