1 Growth Stock Down 75% to Buy Right Now

Do you like bargain-priced stocks? Most investors do. After all (assuming the company in question is worth owning), stepping in at a lower price leads to better net returns than at a higher price.

With that as a backdrop, there’s one bearish stock that bullies might want to add to their portfolio sooner rather than later: chew (CHWY -1.96%). It is in the right place, at the right time, with the right way of offering its products.

What makes Chewy different makes it even better

In case you’re reading this and aren’t familiar with Chewy, it’s an e-commerce site that specializes in selling pet supplies. It is distinctly different from companies like Petco Health and Wellness (WEFT -4.08%) and PetSmart, though. Founded in 2011 after so many other brick-and-mortar rivals set up shop — Chewy is an online-only retailer.

It seems crazy on the surface. PetSmart, Petco and Supplying the tractorPetsense all enjoyed the advantage that not only were they already established brands at the time, but they could leverage and combine their brick-and-mortar businesses with the online ones established in the meantime. It doesn’t even matter the presence of strong players like Walmart and Amazon. And for the record, it wasn’t easy. Chewy’s managed only its lowest inconsistent quarterly profit since 2021.

In a way, though, launching an online-only business so long after the e-commerce industry has proven brilliant. That is, brick-and-mortar competitors like Petco and PetSmart still operate brick-and-mortar stores while also managing online operations established at the dawn of the e-commerce era. The former is an increasingly expensive liability, while the latter is less than optimal for the modern age of online consumerism. This is in stark contrast to Chewy, which was able to launch after already learning valuable lessons from the mistakes of others in e-commerce and built its business from the ground up with only online shopping in mind (A caveat here: Chewy was owned by PetSmart from 2017-2019, but completely spun off from PetSmart shortly after going public in 2019).

The thing is, the plan is working. While retailers like Petsense and Tractor Supply’s PetSmart are seeing only anemic growth (if at all), Chewy’s revenue growth is at least measurable and consistent. According to analysts, the expected growth of 5% for this year should be equal next year. And, there’s much more of the same kind of growth in store — and perhaps more — for the future well beyond that.

Online shopping for pet products is about to grow

Like so many other consumer goods and discretionary product categories, the pet business is increasingly moving online. Although this year is lackluster due to a combination of rising prices and cash-strapped consumers, data from IBIS World suggests that over the past five years, the online pet supply industry in the United States has grown by annual rate of almost 13%.

However, this growth only scratches the surface of the opportunity. A forecast from Bloomberg Intelligence predicts that online sales of pet products in the US could nearly double between last year and 2030, reaching $60 billion a year in the final year of the time frame.

Illustrating the potential growth of this business in another way, market research team Packaged Facts reports that the share of e-commerce in the domestic pet products industry was only 18% in 2018, before reaching 37% in past, on its way to a projected 44% share by 2028. Assuming consumers continue to seek convenience and cost-effectiveness, the online pet supply business could continue to grow at this clip for many, many years beyond 2028.

Being dedicated to an online-only operation and cost-effectively managed, Chewy will earn more than its fair share of this growth. It is also set to see even faster earnings growth now that it has achieved significant scale.

The post-pandemic recession has run its course and then some

None of this is exactly news to investors or analysts, of course. This begs the question: Why is this supposedly bullish stock trading 75% off its high since early 2021?

There is a perfectly good answer. I mean, like many other tickers at the time, it was catapulted higher during and because of the COVID-19 pandemic, simply because people were doing so much online shopping at the time. Almost euphoric at the time, investors were completely oblivious to the fact that Chewy was only marginally profitable at the time and wouldn’t stay that way for much longer.

They would in the end care, though. The share price has been corrected in the meantime.

It probably was fishcorrected though, reflecting post-pandemic frustration rather than the compelling future that is now straight ahead. Even with modest growth in the books this year and next year, earnings per share are expected to improve from $0.09 to $0.22 last year to $0.45 per share next year, demonstrating that Chewy can sustain a respectable and growing level of profitability. This slow but persistent improvement is a big reason why stocks have been able to climb past record lows hit in April this year — the market is finally starting to see the light.

Even so, the gains seen in April are likely just the beginning of a much larger and prolonged advance. Chewy stocks could turn into a particularly strong performance once consumers finally shake off the economic lethargy that interest rate cuts are meant to address, allowing consumers to spend a little more on their pets again.