THE HEDGEYE EDGE
Chewy (CHWY) is one of those rare examples of a company with multiple, powerful, multi-year secular tailwinds that is coinciding with a once in a generation cyclical (positive) demand shock, which should push it over the goal line cash-flow break even this year and then GAAP profitability in 2021.
Our multi-pronged e-comm ‘model defendability’ framework ranks it above Amazon, and ranks far above players like Wayfair. The category is incredibility defendable with 2x GDP growth and is undergoing an accelerated shift to online – right into Chewy’s sweetspot. It has an upper hand in customer ownership in an emerging online duopoly in the pet space between Amazon and Chewy.
The general trend for this industry has been pet ownership is on the rise, spending per pet household is increasing, and the shift to online within the category is accelerating (in part due to pet Rx share gain), Under Covid-19 the shift to online consumption is accelerating rapidly and CHWY is growing customers at its fastest rate ever while customers are also spending more.
While Amazon competes in the space, it is not as dominant in the category, nor does it have the Brand recognition and consumer’s trust that you have with Chewy. CHWY management is trying to temper expectations, guiding to a slight slowdown in growth in the upcoming quarter with concern over a pull forward of customer adoption. That may or may not be the case, we think revenue is more likely to surprise to the upside, but regardless the long-term growth trajectory isn’t reliant on the next quarter.
There are multiple call options embedded in this model. The biggest here is the international growth opportunity, as our outlook has CHWY going to Canada leveraging US DC infrastructure in 2021, and then followed by Western Europe within another 2-years.
Our market bifurcation analysis also shows Asia, surprisingly, as a particularly attractive growth opportunity. Then there’s growth into services, pet meds, and private label which all serve as per-customer spend kickers that should take core US online market share to 50% (from 45%) today at a time when the online model is growing its share of pet spend by 400bp annually. Growth over a TAIL duration is set to re-accelerations given these layers of new business as opposed to mean revert to industry growth rates.
Our above consensus estimates don’t even represent our most bullish scenario. The stock is currently trading at 2.5x EV/Sales – and we think AMZN’s 4x EV/Sales multiple caps CHWY probably at about 3x. But this is an unmitigated growth story – not one we need to bank on multiple expansion.
The current business model alone should result in a $12-13bn top line by FY23, or about $80-$90 per share. And while expensive on an earnings and cash flow basis, the catalyst calendar should line up to support the stock.