Insights

Why Chewy Stock Is Falling Today

What happened

Shares of Chewy (NYSE: CHWY), the online pet products company, were heading lower today. It was one of several e-commerce stocks to take a dive after Walmart slashed its guidance for the quarter, and Shopify, the leading e-commerce software company, said it would lay off 10% of its staff, a reflection of the post-pandemic hangover in e-commerce.

Separately, Wedbush also lowered its rating on Chewy on valuation concerns. As of 11:57 a.m. ET on Tuesday, the stock was down 8.2%.

So what

With the Nasdaq down nearly 2% at noon today, tech stocks and e-commerce stocks were falling broadly in response to the announcements from Walmart and Shopify. Walmart actually raised is comparable-store sales forecast for the second quarter, but slashed its profit guidance as it said higher prices for food and fuel were cutting into budgets for general merchandise like apparel.

While pet products are generally considered to be recession-proof, it’s possible that inflation could be causing some pet owners to cut back on discretionary items like treats and toys. Alternatively, pressure from rising costs could be pinching Chewy’s bottom line as well.

The Shopify news also weighed on e-commerce stocks, offering another piece of evidence that e-commerce businesses had underestimated the slowdown that would follow the pandemic boom as consumer spending has reverted to brick-and-mortar stores and services like travel and restaurants.

CEO Tobi Lütke acknowledged in a company memo that his bet on surging demand continuing beyond the pandemic was wrong.

And Wedbush analyst Seth Basham cut his rating on the stock from outperform to neutral, but raised his price target from $35 to $44 to reflect the stock’s recovery. Basham’s argument seemed mostly valuation-based as he said that its price-to-sales ratio was approaching pre-pandemic levels, though other metrics showed the company struggling to deliver pre-pandemic levels of growth.

Now what

In Chewy’s most recent quarter, revenue growth slowed to 13.7%, and adjusted EBITDA fell by 22% to $60.5 million.

Chewy won’t report second-quarter earnings until early September, but revenue growth is likely to remain muted, below its previously strong growth. While the company has demonstrated its ability to turn a profit, it’s still trading at a steep multiple for a stock with just 14% revenue growth.

Jeremy Bowman has positions in Shopify. The Motley Fool has positions in and recommends Chewy, Inc., Shopify, and Walmart Inc. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.

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