Despite continued growth in the business, Chewy(NYSE: CHWY) stock has not rebounded with the broad market over the last year. Shares are still down 85% from their previous peak, but analysts at Needham see a buying opportunity.
The firm recently maintained its buy rating for the stock with a price target of $25, which also happens to be close to the average price target for all analysts covering the stock.
Why buy Chewy stock?
There are a few factors weighing on the stock price. The company is struggling to grow its active customer count, which declined slightly in the fiscal 2023 third quarter to 20.3 million.
Meanwhile, Chewy reported a net loss of $35.8 million in the same period, down from a $2.3 million profit in the year-ago quarter. A combination of sluggish growth and weak profitability is not what investors want to see.
Chewy is testing the patience of investors, but there are a few things that could prove Needham's analyst right. Chewy is still a leading brand for pet supplies. This is an attractive market that should only continue to grow over the long term thanks rising pet ownership.
Moreover, the shares are quite cheap with a price-to-sales ratio of 0.67, a discount to the broad market. One reason the stock could be significantly undervalued is management's ongoing plan to boost profits over the long term by investing in automated fulfillment centers.
It's for these reasons the stock could indeed hit the analyst's price target this year, although the company will need to show its rebound is picking up steam in the next few quarters. Chewy still has tremendous long-term growth potential and could make a rewarding investment at these lower share prices.
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John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chewy. The Motley Fool has a disclosure policy.
