Morgan Stanley Buys Chewy As Pet Ownership, E-Commerce Grow

Chewy Inc CHWY trades down nearly 32% year to date and 24% from its second-quarter earnings report. One analyst team sees a buying opportunity.

The Rating

Morgan Stanley analysts Lauren Cassel, Brian Nowak and Simeon Gutman upgraded Chewy to Overweight but cut their price target from $34 to $30.

The Thesis

Morgan Stanley considers Chewy one of the best names in the small- to mid-cap Internet category for three reasons.

First, domestic pet ownership is growing, and Chewy competes in a $73 billion domestic industry for staple pet goods.

“We assume CHWY captures [about] 70% of new pet owners and [about] 800,000 existing pet owners (or 1% of existing pet households) on average over the next five years,” the analysts wrote in a report.

Second, brick and mortar businesses continue to cede share to the online pet market, and Chewy could capture 55% of the industry’s incremental eCommerce growth.

Third, the company boasts a “durable” multiple.

“The multiple has compressed by ~25% given concerns around forward revenue, buyer, and profit growth, but we think fears are overdone,” Cassel, Nowak and Gutman wrote. “In addition, part of the pressure has likely been linked to concerns around money losing IPOs ahead of lock ups, but we see CHWY's lock-up date as less of a near-term overhang given the ownership structure (88% of the company still owned by private equity/PetSmart's parent, BC Partners).”

Chewy trades at a multiple similar to those of Revolve Group LLC RVLV, Wayfair Inc W and Stitch Fix Inc SFIX, but Morgan Stanley considers it better positioned with a defensible moat and consistent consumer base.

Price Action

At time of publication, Chwey shares traded up 2.8% at $23.51.

Related Links:

Credit Suisse: Chewy Boasts 6 Growth Drivers

Investors Take A Bite Out Of Chewy's Stock, But The Street Isn't Saying 'Good Boy!'