Chewy: A Recurring Revenue Powerhouse Fueled By Pet Love

seekingalpha04-27

US pet spending is expected to grow at a CAGR of 8% from 2023 to 2030 to reach $250 billion.I expect Chewy to continue gaining market share in the future with the opening Vet Care clinics which could ...

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href=https://seekingalpha.com/article/4686707-chewy-recurring-revenue-powerhouse-fueled-by-pet-love><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>US pet spending is expected to grow at a CAGR of 8% from 2023 to 2030 to reach $250 billion.I expect Chewy to continue gaining market share in the future with the opening Vet Care clinics which could ...</p>\n\n<a href=\"https://seekingalpha.com/article/4686707-chewy-recurring-revenue-powerhouse-fueled-by-pet-love\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0820562030.AUD","symbol_name":"ALLIANZ INCOME AND GROWTH \"AMH2\" (AUDHDG) H2 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Chewy’s business model and growth prospects justify a premium to industry peers.My price target for Chewy is $85 by 2030, representing 455% upside.   NiseriN/iStock via Getty Images Chewy, Inc. (NYSE:CHWY) has seen its shares fall by more than 53% over the trailing 12 months and nearly 36% YTD. This drop seems to be due to investors’ worries over pet spending during this struggling economy. That said, I believe Chewy has substantial potential thanks to its new pet clinic venture that could help it gain market share in the $147 billion pet industry that is expected to grow to $250 billion in 2030. Moreover, I expect the company’s automation efforts and improving cost efficiencies to lead to adjusted EBITDA margin expansion in the coming years. These factors combined with Chewy’s largely recurring business model are why I’m rating it as a buy with a price target of $85 by 2030, implying 455% upside. Pet Spending Growth & Potential Market Share Gains From 2019 to 2023, US pet spending grew at a CAGR of 11% from $97.1 billion to $147 billion. According to the American Pet Products Association, pet spending is forecasted to continue growing at a rapid pace to top $250 billion by 2030, implying a CAGR of 8% from 2023 to 2030. The anticipated growth in pet spending is especially promising for Chewy, thanks to its potential to gain market share in the coming years. There are 2 main reasons why I believe that could be the case. The first reason is Chewy’s expansion in the pet healthcare market through its Vet Care clinics. The company intends to open 4-8 clinics this year, and according to management in the Q4 earnings call, this endeavor will expand its total addressable market by about $25 billion. As such, Chewy Vet Care could drive growth in net spending per active customer (NSPAC) and active customers. In addition to benefiting the top line, I expect this endeavor to improve Chewy’s profitability profile in the coming years. According to Today’s Veterinary Business, small animal hospitals generate a profit margin of 10-15%, while specialty and emergency practices generate a profit margin between 15-25%. In my opinion, the high margins of this business will act as a tailwind to Chewy’s gross margins, adjusted EBITDA, and net profits. The other reason is Chewy’s top-notch customer experience. Pet owners have turned to Chewy thanks to its attractive prices and convenient shipping options. It is for these reasons that the company was ranked first on Forrester’s customer experience index, per Chewy’s 2023 investor day presentation. The same presentation also shows that average miles traveled per package plummeted 28% YoY in Q3 2023 leading to a 7% decline in average days from click to delivery thanks to its Autoship program which I’ll discuss in detail later in the article. In addition to improving customer experience, the improved efficiency in the delivery process should boost adjusted EBITDA margins in the coming years. As a result, Chewy’s market share has been consistently growing over the years, as the following table shows.          Year US Pet Spending CHWY's Revenue Market Share Market Share Growth   2019 $97,100,000,000 $4,846,743,000 4.99%     2020 $108,900,000,000 $7,146,264,000 6.56% 1.57%   2021 $123,600,000,000 $8,967,407,000 7.26% 0.69%   2022 $136,800,000,000 $10,119,000,000 7.40% 0.14%   2023 $147,000,000,000 $11,147,720,000 7.58% 0.19%   Click to enlarge At the same time, Chewy’s customers appear to be sticky since (NSPAC) increased 11.9% YoY in FY 2023 to $555, per the Q4 shareholder letter. This increase in spending offset the marginal YoY 1.6 decline in active customers, leading to a 10.2% YoY revenue growth. Considering the company’s expansion in the pet healthcare market as well as its customer experience, I expect Chewy’s market share to grow by 0.5% annually until 2030. Based on the forecasted growth in US pet spending, I’m forecasting Chewy’s revenues until 2030 as follows.          Year US Pet Spending CHWY's Revenue Market Share Market Share Growth   2024 $159,000,000,000 $12,852,737,959 8.08% 0.50%   2025 $171,000,000,000 $14,677,755,918 8.58% 0.50%   2026 $185,000,000,000 $16,804,443,537 9.08% 0.50%   2027 $199,000,000,000 $19,071,131,156 9.58% 0.50%   2028 $215,000,000,000 $21,679,488,435 10.08% 0.50%   2029 $232,000,000,000 $24,553,680,544 10.58% 0.50%   2030 $250,000,000,000 $27,708,707,483 11.08% 0.50%   Click to enlarge According to my estimates, Chewy’s revenues are expected to grow at a CAGR of 13.9% from 2023 to 2030 compared to 7.9% for US pet spending. With that in mind, my forecast doesn’t take into consideration any international expansions. Successful Business Model As I mentioned earlier, Chewy’s Autoship program has improved the efficiency of the delivery process, which has helped improve customer experience and margins. Autoship can be considered the main pillar of Chewy’s business model. The set-it-and-forget-it program is a free subscription that allows pet owners to schedule recurring purchases of food, treats, pharmaceuticals, or other items they consistently use. It’s safe to say that Autoship has been a massive hit, as revenues generated through the program have been increasing as a share of total revenue over the past years.   10-K Filings As a result, Chewy has a largely recurring business model. This is important to note since this business model creates a lot of visibility into future sales, making them predictable. This is somewhat similar to Costco’s (COST) business model, where you have to be a member to buy from any of Costco’s stores. There’s also a psychological aspect to consider with that model, since knowing you’re a member can help encourage a sense of loyalty. Given the benefits of this model, I expect Chewy’s Vet Care clinics to be a major success due to its customers’ brand loyalty. Moreover, as Vet Care clinics expand across the US, it will provide Chewy with major upselling and cross-selling opportunities with new customers who come in for a one-time medical issue but leave with an Autoship subscription. Valuation Given Chewy’s potential revenue growth and margin expansion, I believe it’s a bargain at the current share price of $15.38 based on its forward EV/adjusted EBITDA multiple. This is the case, in my opinion, thanks to Chewy’s largely recurring business model. Companies with a recurring business model usually trade at a premium relative to their peers. This could be seen by the EV/EBITDA multiples of a number of recurring model companies such as Adobe (ADBE), Microsoft (MSFT), Salesforce (CRM), Roku (ROKU), Netflix (NFLX), and Costco (COST).        Ticker Forward EV/EBITDA Sector Median   ADBE 19.68 14.20   MSFT 24.44 14.20   CRM 18.65 14.20   ROKU 79.83 7.83   NFLX 23.96 7.83   COST 28.06 10.67   Click to enlarge In the Q4 earnings call, management guided FY 2024 adjusted EBITDA margin to be 3.8%. Moreover, management shared in the 2023 investor day presentation that they expect 15% average annual adjusted EBITDA flow through in the coming years. The margin expansion will be mainly driven by automation. Currently, the share of order volume leveraging automation solutions is around 40%. Meanwhile, the company’s long term target is 70-80% which should improve cost efficiencies and profitability in turn. By applying management’s forecast to my aforementioned revenue forecast, I’m estimating Chewy’s adjusted EBITDA and EV/adjusted EBITDA multiples to be as follows.   Own Calculations My forecast for adjusted EBITDA margins in the coming years is in line with management’s long-term target of 10% adjusted EBITDA margin. Considering the premium other companies operating a similar recurring business model are trading at, my target EV/adjusted EBITDA multiple for Chewy is 15 compared to a sector median of 9.42. Based on this, my price target for Chewy is as follows.   Own Calculations Risks The main risk to my thesis is Chewy’s active customer pool. Chewy’s active customers declined 1.6% YoY in 2023 after falling 1.2% YoY in 2022. While Chewy’s growing NSPAC has offset the decline in active customers, any weakness in consumer spending could lead revenues to stagnate or decline. As is, Chewy’s active customer pool hasn’t stabilized yet, and its current valuation could be due to investors bracing for the possibility of revenue growth slowing down. Therefore, customer growth could be critical for Chewy to sustain growth into 2025 and beyond. Conclusion  In summary, I believe Chewy is undervalued at its current valuation with the potential to reach $85 by 2030, 455% higher than its current share price. This is mainly due to the anticipated growth in US pet spending in the coming years and Chewy’s potential to grow its market share thanks to its top-notch customer experience and its newest venture into pet healthcare through Vet Care clinics. Chewy’s largely recurring business model is another reason why I’m bullish on its stock, thanks to its positive contribution to customer loyalty and cost efficiencies. In my opinion, this business model justifies a premium to industry peers, which is why I’m rating Chewy as a buy.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2430200721"}