Chewy (CHWY): A Pawsome Play on Subscription Growth and Margin Turnaround

Why Chewy's AutoShip Dominance and Margin Improvements Position It for a Run to $50+

As the pet care market surges—projected to hit $233 billion by 2030—Chewy (CHWY) stands out as a disruptor with a razor-sharp focus on recurring revenue and margin expansion. Despite lingering valuation concerns, the company's AutoShip subscription model and Vetcare clinic expansion are creating a durable moat. With a recent Zacks Rank upgrade to #2 (Buy), now is the time to consider accumulating shares below $43, targeting $50+ over 12 months. Let's unpack the catalysts and risks.

The Power of AutoShip: Chewy's Recurring Revenue Engine

Chewy's AutoShip program is the backbone of its success, accounting for 82% of total net sales in Q2 2025. This subscription model locks in predictable cash flows while reducing customer acquisition costs (CAC) by 40% compared to one-time buyers. Key metrics:
- Active customers: 20.8 million (up 3.8% YoY), with net sales per customer hitting $583—a record high.
- Retention: 85% of AutoShip sales come from high-margin consumables (e.g., pet food, medications), ensuring steady reorders.
- Margin accretion: AutoShip's scalability has driven adjusted EBITDA margins to 6.2% in Q1 2025, a 50-basis-point jump from 2024, as operational efficiencies and logistics optimization take hold.

Vetcare: The Next Frontier in Pet Care Synergy

Chewy's Vetcare clinics—now numbering 11 and set to expand to 500 by 2026—are a strategic coup. These clinics integrate veterinary services into Chewy's ecosystem, boosting customer lifetime value (CLV) and reducing reliance on commoditized pet products. Benefits include:
- Synergy with AutoShip: Customers using Vetcare are 3x more likely to enroll in AutoShip for medications.
- Margin upside: Vetcare's high-margin services (telehealth, diagnostics) could lift EBITDA margins to 10%+ by 2027, per management.
- Market opportunity: The U.S. pet healthcare market is $44 billion and growing—Chewy is capturing share by offering affordability and convenience.

Zacks Rank #2: A Signal of Turning Sentiment

Chewy's recent Zacks Rank upgrade to #2 (Buy) reflects improved analyst sentiment, driven by:
- Earnings momentum: Q2 EPS beat estimates by 9%, with free cash flow up 20% YoY to $48.7 million.
- Valuation reset: Chewy trades at 14x forward EV/EBITDA, a discount to peers like Amazon (AMZN) (36x) and Petco (WOOF) (22x), despite its superior subscription model.

Near-Term Risks to Watch

• Customer growth moderation: Active customer growth slowed to 3.8% YoY, raising concerns about market saturation. Chewy's Chewy Plus membership program (in beta) must prove its ability to reignite acquisition.
• Margin pressures: Share-based compensation and tariffs could dent profitability. Management aims to stabilize margins at 7.5% by 2026, but execution is critical.
• Amazon's shadow: Amazon controls 63% of Chewy's lost customers. Chewy must differentiate further via Vetcare and exclusive brands to withstand price wars.

Investment Thesis: Buy Below $43, Target $50+

Why now?
1. Margin turnaround: Q2's 6.2% EBITDA margin is a stepping stone to 10% by 2027.
2. Vetcare's inflection point: 11 clinics today, 500 by 2026, creating a sticky revenue stream.
3. Valuation upside: At $40, Chewy is trading at 14x EV/EBITDA—cheap for a company with 8% revenue growth and 30% EPS growth potential.

Risks managed?
- Short-term volatility: A 10% pullback could offer better entry points.
- Long-term bet: Investors must have a 3+ year horizon to capture margin and Vetcare synergies.

Final Verdict: Accumulate Below $43

Chewy's AutoShip model and Vetcare expansion are building a $50+ stock over 12 months, assuming:
- Margins hit 7.5% in 2026 (driving EPS to $1.50+).
- Vetcare clinics reach 50 by end-2025, doubling CLV.

Actionable advice:
- Buy: $38–$43 (10% downside cushion).
- Hold: $44–$47 (wait for margin confirmation).
- Sell: Above $50 (target) or if AutoShip retention dips below 80%.

Chewy isn't without risks, but its subscription flywheel and healthcare pivot make it a compelling long-term bet in a booming pet economy. For investors willing to look past near-term noise, this is a pawsome opportunity.