Chewy stock holds Neutral rating at UBS despite sales momentum

Following Chewy's Q1 results, UBS maintained its Neutral rating with a $46 price target, noting the company's 7.7% revenue growth and market share gains, but expressing concerns over its profitability trajectory and revising FY25 and FY26 adjusted EBITDA and EPS estimates downward. While Chewy's customer growth and online market consolidation are positive, UBS finds the current valuation of 23x next-twelve-months EBITDA less compelling due to uncertain profitability improvements. Other firms, including Guggenheim, JPMorgan, and Morgan Stanley, raised their price targets, citing strong customer growth and revenue potential, though valuation concerns persist among some analysts like Jefferies and Needham.

Analysis

UBS maintained its Neutral rating and $46.00 price target on Chewy Inc. (CHWY) following its first-quarter results, which saw revenue grow 7.7% year-over-year to $12.1 billion, underscoring its continued market share gains in the online pet supplies industry. Despite this sales momentum and an InvestingPro assessment of "GOOD" overall financial health, including a Q1 gross profit margin of 29.2% and diluted EPS of $0.91, UBS expressed reservations regarding Chewy's profitability trajectory, deeming it "not as robust as anticipated." Consequently, UBS revised its fiscal year 2025 adjusted EBITDA estimate down to $672 million and EPS to $0.48, with fiscal year 2026 adjusted EBITDA now projected at $830 million and EPS at $0.76. While acknowledging Chewy's strong position, growing customer cohorts, and consolidation of wallet share, UBS cited "less clear visibility into its profitability improvements" and a valuation of approximately 23 times next-twelve-months EBITDA as reasons for its cautious stance. This contrasts with InvestingPro data indicating the stock trades near Fair Value with a P/E ratio of 44x and an EV/EBITDA multiple of 85.4x. Other analysts, including Guggenheim, JPMorgan, and Morgan Stanley, adopted a more bullish outlook by raising their price targets, highlighting strong customer acquisition (approximately 240,000 new active customers in Q1) and revenue potential. However, firms like Jefferies and Needham echoed UBS's valuation concerns, maintaining Hold ratings despite acknowledging Chewy's market position and growth prospects. The overall sentiment is mixed, reflecting a tension between Chewy's operational strengths and its current market valuation.

Key Decisions for Investors

• Investors should weigh Chewy's demonstrated ability to gain market share and grow its customer base against persistent concerns regarding its profitability trajectory and current valuation multiples, as highlighted by UBS and other analysts.
• Monitor upcoming earnings reports closely for evidence of sustained profitability improvements, which appear to be a key factor for a more bullish reassessment by cautious analysts.
• Consider the divergence in analyst price targets and ratings; while some see upside based on growth metrics, others emphasize valuation risk, suggesting a thorough individual assessment of risk tolerance and investment horizon is warranted.
• Note that while Chewy is consolidating wallet share in an industry shifting online, the path to translating this into significantly improved profitability remains a point of scrutiny, justifying a cautious approach for value-oriented investors.