Chewy's Strategic Turnaround and Valuation Reset: A Test of Momentum and Fundamentals

The recent surge in Chewy's Relative Strength (RS) Rating—from 75 to 81, placing it in the 80-plus percentile—has ignited renewed interest among momentum investors. This technical milestone, tracked by Investors' Business Daily (IBD), signals that Chewy (CHWY) has outperformed the majority of the market over the past 52 weeks. But does this upward trajectory reflect a sustainable strategic turnaround, or is it a fleeting technical artifact in a stock that remains fundamentally overvalued?

The RS Rating: A Momentum Signal, Not a Guarantee

The RS Rating is a blunt instrument. It measures a stock's price performance relative to its peers, rewarding those that climb fastest, regardless of underlying fundamentals. Chewy's jump into the 80-plus percentile is a psychological threshold for many traders, often attracting algorithmic buying and retail investor attention. Yet, as reveals, the stock's technical strength has been volatile, with sharp corrections in early 2025. This raises a critical question: Is the recent upgrade a sign of durable momentum, or a short-term bounce in a company still grappling with structural challenges?

Valuation Metrics: A Tale of Optimism and Skepticism

Chewy's valuation remains a paradox. Its P/E ratio of 45.87 and EV/EBITDA of 61.24—both significantly above the Retail - Cyclical industry median—suggest that investors are paying a premium for its future potential rather than its current performance. For context, highlights its outlier status. While the company's Q2 2025 results—$3.247 billion in revenue and $23 million in net income—show modest growth, they fall short of justifying such lofty multiples.

The disconnect between technical optimism and fundamental caution is stark. Chewy's strategic initiatives—expanding its veterinary clinics, enhancing its Autoship subscription model, and investing in digital advertising—have the potential to drive long-term value. However, these efforts are still in their early stages. The departure of CFO David Reeder and the looming threat of Chinese tariffs underscore operational and macroeconomic risks that could derail progress.

Strategic Turnaround: Progress, But No Clear Path to Profitability

Chewy's Q1 2025 results offered a glimmer of hope: a 6.2% adjusted EBITDA margin and $192.7 million in adjusted EBITDA. Yet, these gains were driven by cost discipline and a favorable product mix, not transformative growth. The company's focus on high-margin services like Chewy+ memberships and veterinary care is promising, but these segments remain small contributors to overall revenue.

Moreover, the pet care market is fiercely competitive. Amazon's foray into pet supplies and traditional retailers like Petco's digital investments threaten Chewy's dominance. shows a decelerating trend, with EBITDA margins peaking at 6.2% in Q1 2025 but still below pre-pandemic levels.

The Investment Case: Balancing Momentum and Realism

For investors, the key is to separate the signal from the noise. The RS Rating upgrade is a positive technical signal, but it should not override a careful assessment of Chewy's fundamentals. The stock's current valuation implies that the market expects a dramatic acceleration in profitability and market share gains. If Chewy can execute its strategic initiatives—scaling its veterinary services, improving gross margins through inventory optimization, and expanding its digital ecosystem—it may justify its multiples.

However, the risks are substantial. A misstep in supply chain management, a slowdown in subscription growth, or a regulatory shift could trigger a sharp correction. The recent downgrade of its price target by Morgan Stanley and the CFO's departure are red flags that demand scrutiny.

Conclusion: A High-Stakes Gamble

Chewy's RS Rating upgrade is a testament to its ability to capture market attention, but it is not a substitute for a robust business model. The stock's valuation reflects a bet on its future potential, not its current reality. For momentum investors, the 80-plus percentile threshold may offer a short-term opportunity. For value investors, the high multiples and uncertain execution path suggest caution.

In the end, Chewy's success will hinge on its ability to transform its strategic vision into consistent financial performance. Until then, the RS Rating upgrade remains a double-edged sword: a sign of momentum, but not a guarantee of sustainability.