Wedbush Initiates Coverage On Chewy: 'We Await A Better Entry Point'

Recent pet product IPO Chewy Inc CHWY has drifted slightly lower since its debut on the market last week, but one analyst said investors shouldn’t be tempted to buy the dip just yet.

The Analyst

Wedbush analyst Seth Basham initiated coverage of Chewy with a Neutral rating and a 12-month price target of $30.

The Thesis

Basham likes Chewy’s scalability and margin expansion potential and believes the stock will eventually make for a great long-term investment. However, the stock seems fully priced based on customer lifetime modeling and the earnings multiples of its peer group. Basham said his $30 price target represents fair value for Chewy shares.

“With CHWY trading above these levels following its $22 IPO last week, we await a better entry point,” he wrote in a note.

Basham said Chewy provides a compelling value for its customers by making finding and buying the right products easier, offering competitive pricing, and making reordering and delivery simple.

Basham said the pet product market is a relatively stable and fast-growing market, and Amazon.com, Inc. AMZN is Chewy’s primary competitor in online pet product sales. Wedbush estimates the U.S. pet care market is valued at $51 billion, and online pet product sales have growth at a 41% compound annual rate over the past five years.

Basham said revenue growth will remain strong but will likely decelerate in the coming years. At the same time, investors should expect margins to expand starting in 2021.

Price Action

Chewy shares traded lower by 4.6% to $32.64 on Friday.

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