Chewy downgraded by Jefferies over valuation concerns

Jefferies downgraded Chewy (CHWY) to 'Hold' from 'Buy' due to valuation concerns, citing the stock's 41% year-to-date surge and its current trading multiple of 24 times projected 2026 EBITDA, which is one standard deviation above historical averages. While acknowledging Chewy's expanding digital footprint and raising 2025 revenue and EBITDA forecasts to $12.44 billion and $700 million respectively, Jefferies believes the current valuation already reflects these positives, along with a potential earnings beat that analysts deem unlikely given modest growth in pet-related spending. The firm's price target was raised to $43, implying a 9% downside from the current share price.

Analysis

Jefferies has downgraded Chewy (CHWY) to 'Hold' from 'Buy', citing significant valuation concerns after the stock's 41% year-to-date surge, which has pushed its trading multiple to 24 times projected 2026 EBITDA—approximately one standard deviation above its historical average. According to Jefferies, this premium valuation already reflects a high degree of expected operational success and a potential first-quarter earnings beat, an outcome considered unlikely in the current macroeconomic climate where US personal consumption data for April indicated only modest 3.5% growth in pet-related spending. Despite acknowledging Chewy's positive operational momentum, including a 4% year-over-year increase in web traffic, a 24% rise in app downloads, and a 7.6% growth in app users, Jefferies posits these strengths are fully priced into the stock. The firm has marginally increased its 2025 revenue forecast for Chewy to $12.44 billion and its EBITDA estimate to $700 million, and projects $13.1 billion in revenue and $824 million in EBITDA for 2026. However, Jefferies' raised price target of $43, derived from 20 times their 2027 EBITDA estimate of $929 million, still implies a potential 9% downside from Chewy's share price at the time of the report, leading them to remain on the sidelines despite recognizing Chewy's earnings improvements from supply chain efficiencies, sponsored ad growth, and pet health initiatives.

Key Decisions for Investors

• Investors should critically assess Chewy's current valuation, which Jefferies indicates already incorporates significant positive future performance, potentially limiting further near-term upside.
• Monitor upcoming earnings reports closely for evidence of continued market share gains and the translation of strong digital engagement metrics into accelerated customer spending, particularly given the modest growth in the broader pet spending category.
• Considering the 41% year-to-date stock appreciation and Jefferies' price target implying a potential 9% downside, existing shareholders might evaluate taking partial profits, while prospective investors could consider waiting for a more favorable entry point or a clearer catalyst beyond what is currently priced in.