Shares of leading pet e-commerce behemoth Chewy (CHWY 6.17%) were up 5% as of 12:45 p.m. ET on Friday, according to data provided by S&P Global Market Intelligence.
Following five separate price target increases from analysts in December, Chewy received its first upgrade of the new year from Wolfe Research, which named the stock one of its top picks for 2025.
Does Chewy still have room to run?
Despite Chewy's stock already doubling from its 2024 lows, Wolfe Research (and I) believe the best is yet to come. The firm cited the pet retailer's Chewy Health business, a growing array of private-label products, burgeoning ad revenue, and higher margins as reasons for optimism.
Several months ago, I listed five key reasons why Chewy was a top stock to buy. Many of these reasons align with Wolfe Research's current sentiments.
While Chewy's active customer count has dropped from 20.7 million in 2021 to 20.2 million today, its gross profit margin improved by four percentage points, and the company has reached break-even (and growing) profitability.
Chewy's plan to open Vet Care Clinics is my favorite reason for believing the company's profitability should continue improving. Chewy currently has six clinics open and plans to have eight operating by year-end.
These vet care facilities not only offer higher margins than retail sales, but could also attract new customers to the Chewy ecosystem.
Pet owners have become dismayed by private equity's presence in the veterinary space, making Chewy's beloved status among customers and vets a massive advantage for them as they disrupt the industry.
With a valuation of just 1.35 times sales, Chewy doesn't need to grow dramatically to live up to its valuation. It merely needs to increase profitability, and it looks well-positioned to do so.
