Key points
- Rubbery stock prices are oversold and overextended in the face of growth and improving free cash flow.
- Net worth increased significantly at the end of F2024 and is expected to grow in 2025.
- Analysts are scaling back targets, but see a floor in the market and a 75% upside to consensus.
- 5 Stocks We Like Better Than Chewy
Chewy’s NYSE: WH the stock price is ready to rebound. The stock is trading near record lows despite growth, improved margins and improved shareholder value, and is oversold. Price action is extended, down more than 85% from higher levels and diverging from indicators. Indicators such as the Stochastic Oscillator and MACD Histogram are diverging and revealing increasing strength amid declining price action. And the recovery could begin soon. The stock is trading near critical support and there are catalysts for investors in the fourth quarter results and guidance.
Dropped gummies on a warm ride
Chewy stock prices fell following the Q4 release and guidance, extending the downtrend to critical levels. However, the shift is due to the comparison with the consensus estimate and overshadows what would otherwise be good results. The company posted revenue of $2.83 billion, a gain of 4.2%, which beat consensus estimates by just 140 basis points.
The gains were driven by non-discretionary items such as health, food and medicine, which supported the strength of the auto-shipping sector. Autoship revenue grew 8% to represent 76.2% of the total, a gain of 300 basis points year over year, which is notable because this is a recurring revenue stream. Active members are a sweet spot and are down 1.6% year-over-year, but offset by increased spend per member. Spending increased 11.9% to deepen digital penetration into consumers’ lives.
The margin is another mixed bag of results that equates to bullish news for the stock price. Adjusted EBITDA margin contracted 30 basis points, but all other comparisons are wider. Gross margin improved for the third consecutive year and net income margin increased 80 basis points to 1.1%. More significantly, free cash flow improved 59% to $67 million to drive improvements in the balance sheet and shareholder value.
The guidance for F2025 is the hardest pill for the market to swallow. The company has targeted accelerated growth and a wider margin this year, but the outlook is in line with consensus estimates. That’s pretty good, but there’s nothing for the market to rally on.
Gummy free cash flow increases value for investors
The story with Chewy over the past two years has been focused on efficient operations while growing, focusing on improving margin and free cash flow. Now that cash flow has improved, the balance sheet is following suit. Balance sheet highlights include liquidity nearly doubling while inventories, investments and receivables also grew. Debt is down, leaving equity up about 200%. Shareholders should not expect capital returns to begin anytime soon, but they could expect equity growth as free cash flow supports growth and balance sheet health.
Analysts continue to favor Chewy.com stock among pet names but are reducing their targets. Marketbeat.com tracks half a dozen reiterated or revised ratings, including several lowered price targets. The bottom line is that analysts rate the stock as a buy and see it trading near the bottom of the expected range. This suggests the market is at historic lows with 75% upside potential according to the consensus. The new revisions point to a range of $25 to $30, in line with consensus at the high end and offering over 50% upside at the low end.
The gummy stock price falls to the critical support level
Chewy stock price action fell more than 5% following its fourth-quarter release, but is still above critical support at an all-time low. The market may drop to retest support at this level, but lower lows are not expected. Divergences in the MACD and Stochastic suggest that the market is on the verge of a reversal and rebound that could begin at any moment. In this scenario, the risk is on the upside, with critical resistance around $22.50. A move above that level would open the door to a full reversal and a sustainable rally.
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