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Why Chewy Was Such a Tasty Stock This Week

What happened

We should never underestimate the power of an analyst's take to move the price of a stock. Case in point: pet comestibles specialist Chewy (NYSE: CHWY), which according to data compiled by S&P Global Market Intelligence shot 33% higher in trading this week.

So what

On Tuesday, Wedbush prognosticator Seth Basham upgraded his recommendation on Chewy to outperform (buy) from the previous neutral. In doing so, Basham also upped his price target on the stock to $35; it was previously $30.

The analyst says that Chewy, which had lost more than 50% of its value year to date, is primed for a rebound on what he terms "relatively favorable" dynamics in the pet food market. He also says that e-commerce in general should start to tick up, and the stock's valuations are now very appealingly low.

Another big reason behind Basham's move is customer churn, a problem that led many investors to abandon the stock. He says this should abate "materially" in 2023. In the second half of this year, meanwhile, he wrote in a new research note, "we expect gross customer add challenges to ease ... as competitors adjust their advertising and acquisition strategies, and shoppers seek value in the online channel." In his view, this should keep customer acquisition costs modest.

Now what

Although Basham lays out a compelling case for Chewy stock, this could be a case of a company getting worse before it gets better. Collectively, analysts are expecting Chewy's per-share net loss to double this year (from $0.18 to $0.36) prior to narrowing considerably (to $0.10) the following year. Revenue is expecting to grow consistently, though, by around 15% both this year and next.

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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chewy, Inc. The Motley Fool has a disclosure policy.


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