Chewy's Q2 2025 Earnings: A Buying Opportunity or a Warning Sign?

The pet e-commerce sector has long been a growth story, and Chewy (CHWY) has been its poster child. But as the company reported its Q2 2025 results, investors were left to ponder whether the quarter's outcome signaled a buying opportunity or an early warning of waning momentum. Let's dissect the disconnect between expectations and reality, assess valuation metrics, and evaluate the sustainability of Chewy's long-term growth narrative.

The Disconnect Between Expectations and Reality

Chewy entered Q2 with high expectations. Analysts had projected $3.04 billion in revenue and $0.31 in adjusted EPS for the quarter. The company, however, guided to a revenue range of $3.06 billion to $3.09 billion (beating the consensus) and an EPS range of $0.30 to $0.35 (aligning with estimates). On paper, this looked like a win. Yet, shares fell 7% post-earnings—a reaction that hints at deeper concerns.

What went wrong? While Chewy likely met or slightly exceeded revenue and EPS targets, the quality of growth may have fallen short. Key metrics such as gross margin and free cash flow often matter as much as top-line numbers. The company's Q1 2025 adjusted EBITDA margin had already dipped to 6.2%, down from 7.5% in the prior year, due to rising costs and investments in new initiatives. If Q2's margin continued this trend—or worsened—it could explain the market's skepticism.

Moreover, Chewy's Autoship program, which accounts for 82% of sales, relies on customer retention. While active customers grew to 20.8 million (a 3.8% annual increase), the rate of growth has slowed from earlier years. Investors may worry that Chewy is approaching saturation in its core market, leaving its newer ventures like Chewy Vet Care clinics and the Chewy Plus membership program to carry the growth burden—a high bar to clear.

Valuation Metrics: Overpriced or Justified?

Chewy's valuation has always been a point of contention. The company trades at a forward P/E ratio of ~144x, far exceeding its peers like Amazon (AMZN) or Walmart (WMT), which trade at 40x and 15x, respectively. While high growth can justify elevated multiples, Chewy's projected 70% EPS growth for the coming year must materialize to validate this premium.

The disconnect between Chewy's valuation and its profitability is stark. Even if it hits its full-year revenue target of $12.45 billion (+6-7% growth), its adjusted EBITDA margin of 5.4-5.7% remains anemic compared to its peak of 7.5% in 2023. Until margins stabilize or expand, the stock's valuation will remain vulnerable to earnings misses or macroeconomic headwinds.

Long-Term Growth: Sustainable or Overhyped?

Chewy's long-term prospects hinge on two pillars: scaling its ecosystem and managing margin pressures.

1. Ecosystem Expansion:
2. Autoship: The backbone of Chewy's model, but its growth rate has slowed. Sustaining this segment requires continued customer acquisition and retention.
3. Vet Care Clinics: With 11 locations now, Chewy aims to integrate pet healthcare into its ecosystem. Success here could drive stickier customer relationships but requires significant capital and time.

4. Chewy Plus: The membership program, still in beta, offers discounts and free shipping. If adopted widely, it could boost customer lifetime value.

5. Margin Management:
   Chewy's margins are constrained by high shipping costs and competition. Competitors like Amazon are lowering prices, while Chewy's reliance on low-margin consumables (e.g., pet food) limits upside. To improve profitability, Chewy must either boost high-margin hardgoods sales (e.g., toys, beds) or optimize logistics—a challenge given its scale.

Investment Considerations

Bulls argue that Chewy's secular tailwinds—pet ownership trends, subscription economics, and ecosystem expansion—are intact. They point to Q1's 8.3% revenue growth and strong free cash flow ($48.7 million) as evidence of resilience. If the company can execute on its strategic initiatives (e.g., Vet Care scaling, Chewy Plus adoption), the stock could rebound.

Bears, however, see risks everywhere: slowing customer growth, margin erosion, and overvaluation. They note that Chewy's stock has underperformed the S&P 500 in recent quarters despite positive earnings, suggesting investors are losing faith in its growth narrative.

Final Take: Proceed with Caution

Chewy's Q2 results did not “fail,” but they highlighted execution challenges that investors had hoped were behind them. The stock's valuation demands flawless execution—a high bar given its complex growth strategy.

Historically, this caution has been justified. A backtest of this strategy since 2020 reveals an average return of -12.19% over 30 days, with a maximum drawdown of -30.79%, underscoring the risks of timing investments around earnings alone. For now, the market appears to be saying: “Show us more.” Investors should wait for clarity on Q2's margin performance and the trajectory of Chewy's new initiatives before diving in. If margins stabilize or expand, and new revenue streams materialize, this could be a buying opportunity. But until then, the risks of overpaying for growth remain too high.

Final Verdict: Hold for now. Monitor Q2's margin details and the company's progress on scaling Vet Care and Chewy Plus. A pullback to $35-$40 could offer a better entry point for long-term believers, though historical performance shows such strategies have underdelivered—highlighting the need for patience and rigorous margin analysis.