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A Coronavirus Vaccine Can't Derail This Top Growth Stock

The news of a potential novel coronavirus vaccine has weighed on the shares of Chewy (NYSE: CHWY) as the online pet retailer was a big beneficiary of the shelter-in-place orders and lockdowns instituted throughout 2020 to contain the spread of COVID-19.

Data by YCharts.

Chewy has taken off in 2020 as people went online for their purchases of pet food and supplies, so it is understandable that some investors believe the arrival of a vaccine will slow the company's growth. But that may not necessarily be the case if the pandemic has simply accelerated a trend that was already in motion. Let's see why Chewy's business may not lose steam in the event an effective vaccine will soon be widely distributed.

Chewy's pandemic-driven growth could be here to stay

Online sales of pet food and supplies were growing before COVID-19, and that trend is expected to continue in the coming years, paving the way for Chewy to maintain its attractive growth. Online sales of pet food and supplies have reportedly been clocking a double-digit annual growth rate in the past five years.

Chewy pointed out on its last earnings conference call that online sales of pet products could jump $3.9 billion this year. The online pet retailer is on track to corner a big chunk of this growth with management expecting the company to increase its revenue by nearly $2 billion in 2020. So, Chewy will exit 2020 with a strong position in a market that still has a lot of room to run.

According to the company's estimate (based on third-party data), the share of online retail in the pet products industry will increase five percentage points in 2020 to 27%. Market research firm Packaged Facts estimates that e-commerce could become the top pet products retail channel as soon as 2024, accounting for 35% of the overall market.

Chewy's customer growth in 2020 tells us that it is in a solid position to take advantage of the expanding opportunity in the long run. The company seems to be converting a good chunk of the new shoppers that it has gained this year into subscription customers, as evidenced by the fast clip at which its Autoship subscription business is growing.

The active customer base swelled by 4.6 million year over year in the fiscal second quarter, an increase of 37.9%. The revenue from its Autoship subscription business increased 45.3% year over year to $1.16 billion, accounting for 68.4% of total sales.

On the other hand, the net sales per active customer increased just 3.2% year over year to $356. The company explains that the slow pace of growth for this metric was due to the big jump in new customers, but that number is likely to pick up in the coming quarters.

Chewy expects that its new customers will eventually increase their purchases in the future and push the net sales per active customer to $500 in their second year with the company and to $700 in the fifth year. As such, the rapid growth in Chewy's customer base in the wake of the pandemic should drive years of gains for the company.

Image source: Getty Images

Branching out into new areas

Chewy has also made a couple of smart moves recently to expand its addressable market. In October, it announced the launch of a telehealth service for pets that will help pet parents get answers to their medical questions without leaving their homes. Shortly after, Chewy followed up its telehealth service with the launch of an online pet pharmacy that allows pet owners to order customized compounded medications based on veterinary recommendations.

The sale of pet medications in the U.S. is expected to exceed $12 billion by 2022 per third-party estimates. A couple of years ago, Packaged Facts had reported in 2018 that online sales of pet medication in the U.S. stood at just 12% of the overall market, so Chewy is looking to make an impact in a segment that still offers a lot of room for growth and could complement its existing business.

The company is providing the pet telehealth service free with the Autoship subscription program, which can help to quickly expand its adoption among customers, paving the way for the growth of the online pet pharmacy business as well.

In all, Chewy investors shouldn't panic on the news of a potential novel coronavirus vaccine as the company is sitting on multiple opportunities and tailwinds that can help it maintain its status as a top growth stock in the long run.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool recommends Chewy, Inc. The Motley Fool has a disclosure policy.


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