Nomura Upgrades Chewy, Says 'Valuation Now More Attractive'

After initially popping as high as $39 per share following its summer IPO, Chewy Inc CHWY shares are down 14% in the past three months as excitement over the pet supply stock has cooled.

On Monday, one analyst said it’s finally time to start scooping up Chewy shares now that the stock’s valuation has become “more attractive.”

The Analyst

Nomura Instinet analyst Mark Kelley upgraded Chewy from Neutral to Buy and raised his price target from $32 to $36.

The Thesis

In the note, Kelley said the stock’s weakness following its second-quarter earnings report was driven mostly by higher-than-expected SG&A, which wasn’t actually as bad as it looked.

“We feel these concerns are overblown; normalizing for certain new and/or non-recurring items (such as fulfillment center buildout and public company costs), the company’s SG&A as a percent of revenue was in line with 2Q18, while gross margins expanded 300bps YoY (and improved sequentially),” Kelley said.

Kelley said Chewy’s network of eight fulfillment centers with more than 5 million square feet of space are a distinct barrier to entry for potential competitors. In addition, Kelley said Chewy can improve its customer acquisition and retention by optimizing its marketing efforts.

However, the biggest driver of the upgrade is Chewy’s valuation relative to peers.

“Even in a pessimistic scenario where the stock trades at two standard deviations below the peer group’s historical average, our valuation framework indicates only marginal downside to current trading levels,” Kelley wrote.

Benzinga’s Take

As is often the case when tech companies go public, the initial wave of buying in Chewy may have gotten the stock’s share price a bit ahead of itself following the IPO. Now that the stock has had time to settle into a valuation and investors have gotten their first look at a quarterly earnings report, long-term investors can focus more on the company’s fundamental outlook rather than the stock’s near-term volatility and headline risk.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

Related Links:

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

Whitney Tilson: 'I Think We Are In An IPO Bubble'