Chewy: A Contrarian Play in the Pet E-Commerce Gold Rush

The pet care market is booming, but Chewy (NYSE: CHWY) has faced a paradox: strong financial results paired with a stock price drop post-earnings. This disconnect has created a compelling contrarian opportunity in a sector where the company's sticky customer base and strategic investments are underappreciated. Let's dissect why Chewy's recent performance signals undervaluation—and why a bold trader's bet might just be prescient.

The Earnings Surprise That Missed the Mark

Chewy's Q1 2025 results were a mixed bag of growth and margin pressures. Revenue hit $3.12 billion, a 8.3% year-over-year jump, driven by its Autoship subscription program, which now accounts for 82.2% of sales. Active customers rose to 20.76 million, with net sales per customer hitting $583—a testament to the power of recurring revenue.

Yet the stock plunged 11.3% post-earnings, as investors fixated on two negatives:
1. Gross margin dipped to 29.6%, down 10 basis points year-over-year, due to operational costs and non-recurring benefits in 2024.
2. Free cash flow fell 7.4% to $48.7 million, a casualty of capital expenditures on fulfillment centers and technology upgrades.

Why the Drop Was Overdone: Chewy's Unappreciated Strengths

The sell-off overlooked Chewy's structural advantages that position it as a leader in pet e-commerce:

1. The Subscription Moat: Autoship's Unrivaled Stickiness

Autoship's 82.2% contribution to sales isn't just a statistic—it's a defensive moat. Customers enrolled in the program spend 3.7x more than non-subscribers and churn at a fraction of the rate. This recurring revenue model insulates Chewy from price wars and macroeconomic volatility. As CEO Sumit Singh noted, Autoship's 14.8% YoY sales growth outpaces overall revenue growth by 650 basis points, making it a cash flow machine.

2. Margin Expansion on the Horizon

While gross margin dipped slightly, Adjusted EBITDA rose 18.1% to $192.7 million, with a 50-basis-point margin improvement to 6.2%. Management's focus on private-label products (which carry higher margins) and AI-driven efficiency in fulfillment is starting to pay off. The long-term goal of a 10% Adjusted EBITDA margin—up from 3.3% in 2023—suggests Chewy is on a path to profitability that the market has yet to price in.

3. Secular Tailwinds: Pet Humanization and Ecosystem Building

The pet care market is growing at 3–4% annually, but Chewy is aiming for 6–7% revenue growth through vertical integration. Its Chewy Vetcare clinics—now 11 locations with plans to add 8–10 more in 2025—are a game-changer. These clinics not only drive customer acquisition (new customers from clinics outperform internal models) but also deepen engagement by offering wellness services alongside product sales.

Meanwhile, sponsored ads—a new revenue stream leveraging Chewy's first-party data—are contributing meaningfully. Off-site ads (e.g., social media) are expanding supply and demand, with margins that, while slightly lower than on-site ads, still add to profit.

The Trader's Contrarian Bet: Why Now?

The post-earnings dip saw institutional investors pounce, with funds like Mackenzie Financial and Allworth Financial increasing stakes. This activity signals confidence in Chewy's long-term story. The veteran trader's move—likely buying on the dip—hinges on three factors:
1. Valuation: At $40.60 post-drop, Chewy trades at 14x 2025E sales, a discount to its historical average and peers like Amazon.
2. Balance Sheet Strength: $616 million in cash and no debt give Chewy flexibility to invest in growth (e.g., clinics, tech) without diluting shareholders.
3. Execution Momentum: Autoship, Vetcare, and ads are all scaling, with management reaffirming a $550 million free cash flow target for 2025.

Risks to Consider

• Margin Volatility: Share-based compensation and capital spending remain headwinds. Gross margin compression could persist if operational costs rise.
• Competition: Walmart and Petco are ramping up pet offerings, though Chewy's subscription model and vet clinics offer a unique value proposition.
• Macroeconomic Slowdown: Pet spending is resilient, but a prolonged recession could pressure discretionary purchases.

Investment Thesis: Buy the Dip, But Keep an Eye on Metrics

Chewy's Q1 results were a mixed bag, but the long-term narrative remains intact: Autoship's stickiness, margin expansion, and ecosystem plays are undervalued. The trader's bet reflects a view that the market is overreacting to short-term noise while ignoring Chewy's $100 billion+ addressable market.

Actionable advice:
- Buy CHWY if you're comfortable with volatility and believe Chewy can hit its $550 million free cash flow target.
- Watch for: Gross margin stabilization, Vetcare clinic performance, and Adjusted EBITDA margin expansion beyond 6.2%.
- Avoid if you prioritize dividend income or are overly concerned about near-term macro risks.

Conclusion

Chewy isn't just a pet retailer—it's building a full-stack pet care ecosystem with defensible economics. The post-earnings sell-off may have been a knee-jerk reaction to short-term metrics, but the fundamentals suggest this is a buy at current levels. For contrarians willing to look past the noise, Chewy offers exposure to a secular winner in a growing market.

Invest wisely, and keep an eye on those Autoship metrics—they're the real bellwether here.