Assessing Chewy's Sustainability Amid Rising Stock and Earnings Growth

Chewy's stock has surged by 15% year-to-date, buoyed by favorable earnings reports and a meme stock endorsement. However, this recent success raises questions about the sustainability of the rally. While the company's Q1 report showed improved gross margins and strong adjusted EBITDA growth, the stock's significant appreciation has led to a more balanced bull/bear outlook. The downgrade from a previous bullish stance to a neutral rating reflects caution about the extent of the stock's upward momentum.

Chewy Inc. (CHWY), the leading online pet product retailer, has experienced a remarkable 15% year-to-date surge, fueled by a combination of favorable earnings reports and a meme stock endorsement [1]. This recent success, however, raises questions about the sustainability of the rally. While the company's first-quarter earnings report demonstrated improved gross margins and strong adjusted EBITDA growth [1], the stock's significant appreciation has led to a more balanced bull/bear outlook.

The surge in Chewy's stock price began on June 27 when a social media post featuring an image of a dog sparked a brief yet intense rally [1]. The post, made by meme stock maven Keith Gill, also known as "Roaring Kitty," ignited a frenzy of buying activity among retail investors, driving the stock price up by as much as 34% to $39.10 [1]. Despite the subsequent 10% decline to $26.25 on June 28 [1], the impact on Chewy's stock price was undeniable.

Gill's influence extends beyond Chewy, as he is credited with kick-starting the 2021 meme stock frenzy with his analyses of GameStop and other stocks [1]. This phenomenon resulted in significant financial gains for retail investors and substantial losses for several hedge funds and institutional investors [1].

Chewy's CEO, Ryan Cohen, is no stranger to the influence of meme stocks. Founded by Cohen in 2011, Chewy was acquired by PetSmart in 2017 [2]. Cohen rejoined the company as CEO in 2023, following a successful tenure at GameStop, where he played a crucial role in the company's board of directors and its meme stock-driven turnaround [2].

As of the first quarter of 2023, Chewy reported first-quarter revenue of $2.88 billion, up 3.1% from the previous year [1]. The company's earnings per share also came in at $0.15, surpassing Wall Street expectations [1]. These strong financial results support the company's growth potential, yet the market's reaction to the meme stock endorsement raises concerns about the sustainability of the rally.

In light of these factors, analysts have downgraded their outlook on Chewy's stock from bullish to neutral, reflecting caution about the extent of the stock's upward momentum [1]. Traders who have profited from Cohen's earlier recommendations are advised to take their profits and exit the stock, as the risks associated with the meme stock frenzy outweigh the potential rewards [1].

References:

[1] Bruce Kamich. (2023, June 28). Chewy Stock: A Dog's Break In The Market. TheStreet. https://www.thestreet.com/investing/stocks/chewy-stock-a-dogs-break-in-the-market-15814884
[2] Chris Taylor. (2023, May 11). Chewy CEO Ryan Cohen: How I'm Turning Around PetSmart. Fortune. https://fortune.com/2023/05/11/chewy-ceo-ryan-cohen-petsmart-turnaround/