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Investors should buy shares of underperforming Chewy as the pandemic-driven consumer base matures and the company’s earnings outlook improves, according to Goldman Sachs. Analyst Eric Sheridan upgraded pet supplies e-commerce stock Chewy to buy from neutral and raised his price target by $8 to $50. With this target, Sheridan thinks the stock can rally 31.6% over the next year from where it ended Friday. Shares rose 4.9% in Monday’s premarket. The stock has underperformed the S & P 500 this year, up just 2.5%. “With shares underperforming the S & P by ~1000bps YTD, we view the stock as having an attractive risk/reward profile especially as the company pivots towards a narrative of returning to customer growth (last quarter of lapping pandemic cohort attrition) and as Chewy runs up against long-term margin targets,” he said in a note to clients Monday. CHWY .SPX YTD mountain Chewy vs. the S & P 500, year to date Sheridan said Chewy should be able to notch topline growth of at least 10% between 2023 and 2027. That’s because of boosts from customers returning and rising revenue as the pandemic base matures. Chewy should also be helped strategic initiatives such as international expansion and sponsored advertisements. Similarly, he said the company should see margin expansion over the next half-decade, due in part to growth of its private label and health care businesses at high margins. Margins should also get a boost as the company improves its supply chain and increases automation at fulfillment centers. Sheridan raised forward operating estimates for both revenue and adjusted EBITDA. The company is expected to report earnings next month, according to FactSet. To be sure, Sheridan said performance could be impacted if Chewy’s consumer base does not stabilize or if spending rates do not accelerate. Any disruptions to the macroeconomic environment or key product initiatives could also hurt shares, he said. — CNBC’s Michael Bloom contributed to this report.
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