On March 27, analysts at RBC Capital Markets reiterated their buy rating for Chewy (CHWY -6.53%) stock with a $42 price target that suggests more than 25% upside from where the stock trades as of this writing. They weren't alone in their optimism. Several other analysts were impressed by Chewy's full-year fiscal 2024 results, which showed strong revenue and profit growth.
So, why are shares trading at such a historically discounted valuation? The answer to this question lies in the charts below.
NYSE: CHWY
Key Data Points
This is why Chewy stock is still cheap
In 2020 and 2021, Chewy shares traded above 5 times sales. Today, its price-to-sales ratio has fallen to just 1.2. The driving force behind that contraction was sales growth, or the lack of it. For much of 2020 and 2021, quarterly sales growth consistently topped 30%as huge numbers of people brought home pets during the pandemic. This caused a huge spike in demand for pet food, toys, and accessories -- all things that Chewy sells.
However, this pandemic-fueled demand spike was temporary. Chewy's sales growth normalized at around 5% to 10%, bringing its valuation down with it.
While shares are cheap on a price-to-sales basis, the stock is a buy for another reason: rising profits.
Data by YCharts.
Even in the face of slowing sales growth, higher costs due to inflation, and mounting competition, the company has been able to expand its profitability with a higher net profit margin. Earnings per share jumped tenfold in fiscal 2024 on revenue growth of just 6%. These numbers suggest Chewy has reached an inflection point in terms of scale and profitability.
Now trading at 37 times trailing earnings and just 27 times forward earnings estimates, Chewy shares may not appear undervalued. But if profit margins continue to expand, the resulting earnings growth could offset a sluggish top line in the coming years, making the stock even more of a bargain than it appears to be when looking at revenue growth alone.
