Should You Add Chewy Stock to Your July 2024 Portfolio?

Should You Add Chewy Stock to Your July 2024 Portfolio?

The stock market can be unpredictable with new names emerging every day, one name that has captured the attention of investors recently is Chewy stock.

Known for its online pet products and services, Chewy (NYSE: CHWY) has seen significant price movements, particularly after a notable mention by the meme stock influencer Keith Gill, also known as Roaring Kitty.

In this post we will delve into whether Chewy stock deserves a place in your July 2024 portfolio, examining the company’s recent performance, growth prospects, and market position.

Understanding the Recent Buzz

Keith Gill’s influence on the stock market is well-documented. His involvement in the GameStop (NYSE: GME) saga showcased the power of retail investors and social media. His recent post on X (formerly Twitter), featuring a cartoon dog, sparked speculation that he might be targeting Chewy stock next.

recent post on X

This post alone sent CHWY shares up more than 11% in early trading, although the gains were largely given up by the afternoon. The power of social media and meme stock trading is undeniable, with Gill’s previous success in the GameStop saga still fresh in investors’ minds.

While it’s unclear if Keith Gill is actively targeting Chewy or merely testing the waters, his influence can drive significant short-term price movements. This speculative boost, however, should be considered with caution by long-term investors who need to focus on the company’s fundamentals.

Key reasons why Chewy stock will continue to rise

Chewy stock will continue to rise

Despite the recent meme stock speculation, Chewy’s fundamentals present a compelling case for long-term investment. Here are five reasons why Chewy stock could see its profitability continue to rise, making it a strong candidate for your portfolio.

1. Dominance in Pet Healthcare

Chewy has expanded beyond traditional retail sales of pet food and toys to build a $3 billion pet healthcare business named Chewy Health. This segment includes prescription and over-the-counter medicines, supplements, and veterinary diets, accounting for roughly 30% of the company’s sales. Notably, these products have a gross profit margin 10 percentage points higher than Chewy’s retail business, contributing significantly to the company’s profitability.

As the No. 1 pet pharmacy in the U.S., Chewy has ample opportunity to grow its market share in the pet healthcare niche. The company is also opening veterinary clinics, which could further enhance its margins and attract new customers.

2. Expansion into Veterinary Clinics

Chewy’s foray into the veterinary space with its own clinics is a strategic move that could bring substantial benefits. The average veterinary clinic in the U.S. has a net profit margin of over 10%, significantly higher than Chewy’s current 2.3%. This expansion could be welcomed by both pet owners and veterinarians, especially as private equity firms dominate the industry with a profit-focused approach.

3. Pet Insurance Partnership

Chewy has partnered with Trupanion and Lemonade to offer pet health and well-being insurance through its CarePlus program. The pet insurance industry, currently valued at around $4 billion, is expected to grow by 17% annually through 2027. With only 3% of pet owners currently using pet insurance, Chewy has a vast growth runway ahead. Importantly, these insurance sales have nearly 100% gross profit margins due to the nature of Chewy’s partnerships, adding a highly lucrative revenue stream.

4. Growth in Private-Label Products

Private-label products represent another high-margin opportunity for Chewy. Currently, these products account for only 5% of total sales, but management aims to increase this to 15% over the long term. Chewy’s in-house brands, such as American Journey and Vibeful, offer value pricing and higher profit margins compared to national brands. Expanding private-label offerings can enhance customer loyalty and drive margin improvements, particularly as Chewy looks to enter new categories like private-label cat food.

5. Promising Sponsored Ads Program

One of Chewy’s most promising ventures is its sponsored ads program, which has been a significant driver of gross margin improvement since its launch in late 2022. Sponsored ads currently account for more than 1% of Chewy’s total sales, with the potential to grow to 3% of revenue. These ads boast a gross profit margin of around 70%, providing a substantial boost to the company’s bottom line.

Should You Buy Chewy Stock Now?

Chewy’s five margin-expanding opportunities, combined with its efficient auto-ship operations and the steadily growing pet care industry, make for a compelling investment case. The company’s stock remains reasonably valued with a price-to-sales (P/S) ratio of just 1, compared to the S&P 500 Index’s average P/S of 2.5. Despite the recent run-up in Chewy stock price, its high-margin opportunities are still discounted, presenting an attractive entry point for investors.

Final Thoughts

While the influence of meme stock trading and figures like Roaring Kitty can create short-term volatility, the fundamental strengths of Chewy stock make it a solid long-term investment. The company’s strategic expansions into pet healthcare, veterinary services, pet insurance, private-label products, and sponsored ads provide multiple avenues for margin growth and increased profitability.

Investors should consider adding Chewy stock to their portfolios not just based on speculative movements but due to its robust business model and growth potential. As always, it’s essential to conduct thorough research and consider your investment goals and risk tolerance before making any decisions. Chewy’s combination of innovation, market leadership, and strategic growth initiatives make it a stock worth considering for July 2024.

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