When you walk into a PetSmart on a Saturday afternoon, you’ll see exactly the type of customer that helped Chewy grow into a multibillion dollar business: shopping carts filled with forty-pound bags of kibble, a parrot calling out from somewhere near the back, and the subtle scent of cedar from the small animal aisle. They are automatically purchasing dog food. They don’t compare prices. Years ago, they established an Autoship membership, but they haven’t given it any thought since.
This type of behavioral stickiness is the foundation of Chewy’s entire business strategy, and on that specific metric, it’s operating incredibly well: free cash flow increased by 24% last year, and recurring subscriptions account for almost 83% of total revenues. Meanwhile, the stock has dropped by around 40%. The dilemma worth pondering for a while is the discrepancy between company performance and share price.
Understanding what the market is truly pricing at any one time is necessary to explain why the stock is down while cash flow is increasing; at the present, investors appear to be pricing fear more than fundamentals. When compared to the expectations built into the valuation it held two years ago, when the pet economy was still riding a post-pandemic adoption wave and growth appeared to continue accelerating endlessly, Chewy’s top-line sales growth has slowed to about 6%, which sounds fair.
The wave broke. Although not as quickly as the multiple predicted, revenue is still increasing. The market modifies its assessment of the company’s value as growth slows, sometimes more sharply than bulls would want to acknowledge and sometimes more aggressively than the underlying statistics support. This could be an instance of both occurring at the same time.
Although it is not new, Amazon and Walmart’s competitive pressure is genuine and ongoing. Both have been attempting to eat Chewy’s lunch for years without succeeding, mainly because logistics-optimized giants have found it difficult to match Chewy’s customer service—its responsiveness, its handwritten cards to bereaved pet owners, and the unique emotional texture of how it handles its relationship with customers. The character of the more recent threat is different.
If the more negative predictions come to pass, AI shopping agents won’t give a damn about sentimental brand loyalty. They use an algorithm to compare pricing and direct purchases to the lowest-priced vendor. Customers must come to Chewy rather than be diverted from it in order for Chewy to generate profitable advertising and affiliate income. This dependence is real, but it’s still unclear how much of it is a structural issue and how much of it is just market anxiety leading up to an unrealized outcome.
When they occur in isolation, leadership departures seem manageable, but when they occur in succession, they are less so. The CFO left first, then the CTO. Both are not inherently detrimental to a company’s long-term success, but when they come at a time when the growth story is already under scrutiny, they cause a particular kind of investor reluctance. This is not panic, but rather a reluctance to invest additional funds in a thesis that needs assurance in its execution. It’s difficult to ignore how frequently these staff changes occur at times when a stock most needs the market to give it some leeway.
Chewy does, however, have a debt-free balance sheet, a buyback program that actively returns cash to shareholders, and a forward P/E ratio that has dropped into the low teens, making it legitimately affordable for a cash-generating company with 83% recurring revenue. When they look at those figures, some value-oriented analysts perceive a discount. Growth investors are focusing on the 6% increase in revenue before continuing. The same company is being read by both sides. In the end, the pet stock dilemma comes down to which version of Chewy you support—the one that’s making more money than ever or the one that might be gradually losing the race it doesn’t yet realize it’s in.
