TipRanks Smart Value #59: Pawsitive Upside

Shrilekha Pethe on April 21, 2026

Dear Investors,

Welcome to the 59^th edition of the TipRanks Smart Value Newsletter.

This Week’s Top Value Pick: Chewy (CHWY)

Chewy (CHWY) is a U.S.-based digital pet care company offering food, supplies, and healthcare products across consumables, hard goods, and pharmacy categories. The company operates an e-commerce platform that combines branded and private-label offerings with a growing focus on integrated pet care solutions. In recent years, Chewy has expanded beyond core retail into areas such as pet healthcare and insurance, positioning itself to participate more broadly in the evolving pet care ecosystem and capture higher-value customer relationships over time.

Kennel to Care

Chewy traces its origins to 2011, when it was launched as an online platform for pet food and supplies. However, it was only two years later in 2013 when the company formally incorporated. The company quickly differentiated itself through a customer-centric model built on competitive pricing, fast delivery, and high-touch service. Early investments in logistics and fulfillment infrastructure enabled rapid scaling as pet owners increasingly shifted toward online purchasing.

A major inflection point came in 2017, when Chewy was acquired by PetSmart, providing additional capital and operational resources to expand its assortment, supply chain, and customer base. Growth accelerated during this period, supported by rising pet ownership and the broader e-commerce shift, while the Autoship subscription program strengthened retention and improved revenue visibility. Chewy went public in 2019, and in 2020 it separated from PetSmart, continuing as an independent company with BC Partners remaining a key shareholder.

Following its separation, Chewy steadily expanded beyond its core retail operations into higher-margin services, including pet pharmacy, telehealth, and insurance, while also launching veterinary clinics under Chewy Vet Care. In parallel, the company refined its acquisition strategy to support the development of a more integrated pet healthcare ecosystem.

This shift became evident with the 2022 acquisition of Petabyte Technology, which added veterinary software capabilities and strengthened Chewy’s PracticeHub platform. Building on this foundation, Chewy acquired the SmartEquine business from Covetrus in 2025, expanding its presence into equine care. The SmartEquine acquisition, in particular, introduces a higher-margin category focused on supplements and nutraceuticals, with targeted gross margins above 35%. While 2026 is expected to be a stabilization year with minimal financial contribution, the business has the potential to scale into a few hundred million dollars in revenue over time, with margins in the 35%–45% range.

The company also announced the acquisition of Modern Animal earlier this year, which is expected to significantly scale its clinic network and deepen its healthcare footprint. The transaction is expected to close in the second quarter of FY26 and will add over $125 million in annualized run-rate revenue, expanding Chewy Vet Care’s presence from 18 to 47 locations nationwide. While the deal is expected to be EBITDA-dollar neutral on a pro forma basis in 2026, it is projected to become accretive to EPS within the first year after closing. In addition, synergies between Chewy Vet Care and Modern Animal are expected to drive a 15% to 20% increase in net sales per active customer (NSPAC) across the veterinary network, further strengthening customer monetization.

Alongside these initiatives, Chewy has continued to invest in automation, technology infrastructure, and international expansion, including its entry into Canada.

Today, the company has evolved from a pure e-commerce retailer into a vertically integrated pet care platform, combining products, services, and healthcare offerings to support long-term growth and improving profitability.

Care Platform

Chewy operates a digital-first pet care platform built around recurring consumption, customer loyalty, and an expanding suite of higher-margin services. The company generates most of its revenue through the sale of pet food, treats, and everyday supplies. In other words, products that are purchased frequently and tend to be non-discretionary, creating a stable demand base.

A key driver of Chewy’s business model is its Autoship subscription program, which allows customers to schedule recurring deliveries of essential items. This not only improves convenience for pet owners but also enhances revenue visibility, increases customer retention, and supports consistent order volumes. Over time, customers typically expand their spending as they engage more deeply with the platform, benefiting from Chewy’s broad assortment of over 100,000 products and strong supplier relationships.

Beyond core retail, Chewy has been expanding into higher-margin categories that support earnings growth. Its pet pharmacy business, which includes prescription medications and specialized diets, has become a significant contributor, benefiting from repeat purchases and increasing healthcare spending per pet. The company has also introduced telehealth services, insurance and wellness plans, and veterinary clinic operations under Chewy Vet Care, positioning itself across the full spectrum of pet care.

Operationally, Chewy’s vertically integrated fulfillment network and investments in automation help drive efficiency and scale. Its strategically located distribution centers enable fast delivery across most of the U.S., while growing order volumes improve fixed-cost leverage over time. Additionally, private-label brands offer better margins compared to third-party products, which further supports profitability.

The company is also building complementary revenue streams through advertising and vendor services on its platform, monetizing its large and engaged customer base. As Chewy continues to scale its ecosystem, combining consumables, healthcare, services, and technology, it is strengthening its ability to generate more predictable revenue, expand margins, and improve cash flow over the long term.

Ecosystem Unleashed

The broader pet industry is currently growing at a modest pace, with demand increasing in the low single digits, driven primarily by higher volumes rather than price increases. Trends remain mixed, with softer demand in dog-related products and relatively stronger growth in the cat category. New pet adoption is stable, with no meaningful rebound expected, implying that future growth will rely more on increased spending per existing customer rather than a surge in new pet owners.

Despite this backdrop, the long-term shift toward e-commerce continues to benefit Chewy. Its Autoship subscription program (over 80% of sales), efficient fulfillment network, and strong customer satisfaction underpin a “flywheel” model, where customer acquisition, reliable delivery, and a high-quality experience reinforce each other, driving repeat purchases, higher loyalty, and balanced growth across both customer additions and spending per customer (NSPAC).

Chewy’s health category, comprising prescription medications, specialty diets, supplements, and veterinary services, accounts for roughly 30% of revenue and represents a key growth and margin driver. Demand in this segment is more resilient and less discretionary, with higher repeat purchases and stronger pricing. The integration of CVC further strengthens this ecosystem, linking services with product sales and driving higher customer spending over time.

Chewy Vet Care (CVC) is an early but increasingly important part of this ecosystem. The company operates 18 clinics, including 10 opened in 2025, and performance has exceeded expectations. Beyond direct revenue, CVC drives higher NSPAC, as vet visits lead to follow-on purchases such as medications, prescription diets, and ongoing care products. Strategically, it serves as both a customer acquisition channel and an engagement driver, deepening relationships and increasing wallet share.

At the same time, Chewy is deploying artificial intelligence across customer service, fulfillment, pharmacy, and marketing. These initiatives are expected to generate cost savings in the low tens of millions in 2026, scaling to over $50 million annually by 2027. The largest opportunity lies in fulfillment, particularly picking and packing, which accounts for roughly 60% of variable costs. AI also supports Chewy’s positioning in “agentic commerce,” where its recurring Autoship model and control over transactions and fulfillment reduce disruption risk.

The company is also expanding its private-label strategy through the “Chewy Made” platform, focusing on consumables such as pet food and treats, a $50–60 billion market. These products carry higher margins and are targeted to reach a mid-teens percentage of sales over time, compared to low- to mid-single-digit penetration today. Growth is particularly underpenetrated in consumables, despite strong traction in hard goods.

The Chewy+ membership program remains in a test-and-learn phase, with approximately 4% penetration. Early results show higher customer spending and incremental value, but management is prioritizing optimization around retention, promotional efficiency, and program structure before scaling.

Marketing efficiency is also improving, with advertising and marketing expected to decline to around 6%–6.5% of sales. This is driven by brand-building efforts, increased app engagement, and a shift toward direct, recurring customer relationships, reducing reliance on paid acquisition.

Customer cohort trends remain strong, with 2024–2025 cohorts now performing in line with legacy cohorts in terms of repeat purchases and order frequency. Newer cohorts, particularly those engaged with CVC, the app, and newer platform features, are driving faster NSPAC growth. Notably, this performance does not assume a rebound in pet adoption, highlighting continued market share gains.

Gross margin is expected to expand further in 2026, though at a more moderate pace. Sponsored advertising remains a high-margin contributor, but growth may taper slightly due to a shift toward lower-margin offsite ads. Meanwhile, mix improvements toward premium and health-related products, along with growing private-label penetration, continue to support profitability.

Stable Stride

Over the past three years, Chewy has delivered steady growth, with revenue increasing at a CAGR of around 8%, primarily driven by higher spending per customer. This growth has been supported by the continued expansion of Autoship subscriptions, ongoing premiumization trends, and deeper penetration into pet healthcare. During the same period, earnings growth has significantly outpaced revenue, with EPS rising 63%, reflecting margin expansion from private-label products, a favorable shift toward higher-margin categories, and improved operating efficiency.

This momentum carried into FY25, as Chewy reported a strong set of results marked by consistent growth and improving profitability. Net sales surpassed $12.6 billion for the year, rising 8.3%, while fourth-quarter revenue increased 8.1% to $3.26 billion, broadly in line with expectations. Customer growth remained steady, with active customers reaching 21.3 million, up 4% year-over-year, supported by approximately 810,000 net additions during the year. Engagement levels also improved, with net sales per active customer (NSPAC) rising 4% to $591 in the fourth quarter.

Autoship continued to anchor the business, accounting for roughly 83% of total sales, or $10.5 billion, and growing 14% year-over-year. This high level of recurring revenue has reinforced visibility and stability across Chewy’s operations. At the same time, margins expanded meaningfully. Gross margin improved to 29.8% for the year, up 60 basis points, while fourth-quarter gross margin rose 90 basis points to 29.4%. The expansion was driven by growth in sponsored advertising, a favorable mix shift toward premium and healthcare products, and more disciplined promotional activity.

Cost control remained a key strength. Adjusted SG&A, excluding stock-based compensation and one-time items, held steady at approximately 18.8% of sales for the year, with modest leverage in the fourth quarter. Advertising and marketing expenses also improved, declining to 6.5% of sales and reflecting better efficiency. These factors supported a 26% increase in adjusted EBITDA to $719 million, with EBITDA margin expanding 90 basis points to 5.7% in FY25. Adjusted EPS reached $1.27 for the year, while fourth-quarter adjusted diluted EPS came in at $0.27.

Cash generation remained robust, with free cash flow reaching a record $562.4 million, supported by strong operating cash flow of $691.6 million. Capital expenditures totaled $129.2 million, and the company ended the year with a solid balance sheet, including $879 million in cash and marketable securities, no debt, and total liquidity of $1.7 billion.

Looking ahead to FY26, Chewy expects to build on this foundation with continued growth and further margin expansion. The company has guided for net sales of approximately $13.68 billion at the midpoint, representing growth of about 8.5%, including a modest contribution from the SmartEquine acquisition. Revenue is expected to be lowest in the first quarter at $3.35 billion, with growth accelerating sequentially through the middle of the year.

Profitability is projected to improve at a faster pace, with adjusted EBITDA margin expected to reach 6.6% to 6.8%, implying roughly 100 basis points of expansion and total adjusted EBITDA of $900 million to $930 million. Unlike FY25, where gross margin drove much of the improvement, FY26 expansion is expected to be led more by SG&A leverage, supported by structural efficiencies such as the ramp-up of its Houston fulfillment center and increased use of AI. Gross margin is still expected to improve, though at a more moderate pace, while advertising efficiency gains are likely to be incremental.

From a timing perspective, margins are expected to follow a more typical seasonal pattern, without the unusually strong second-quarter peak seen in the prior year. SG&A as a percentage of sales should remain relatively stable throughout the year, while margins are expected to moderate in the fourth quarter due to seasonality and promotional activity.

Measured Expansion

Shares of Chewy have declined by more than 18% over the past year, as investor expectations have reset amid moderating revenue growth and limited customer expansion. The company’s guidance has also pointed to steady though not accelerating growth, reinforcing the view that Chewy is entering a more mature phase. At the same time, a more cautious outlook, rising competitive pressures, and a broader valuation reset across the e-commerce sector have contributed to a re-rating of the stock.

This shift is clearly reflected in Chewy’s valuation, with the stock now trading at a steep discount to its historical averages. It is down more than 60% on metrics such as non-GAAP trailing and forward P/E, forward EV/EBITDA, and price-to-cash-flow, and over 40% on a forward EV/Sales basis, highlighting a significant reset in investor expectations.

Competition remains intense, led by Amazon, which dominates online pet sales with scale, pricing, and logistics advantages, and Walmart, which targets value-conscious consumers through private-label offerings and omnichannel convenience. Petco serves as a closer specialty peer; however, as a small-cap company with a market capitalization under $1 billion, its lower valuation partly reflects its smaller scale and helps explain Chewy’s more balanced positioning within the group.

Within this landscape, Chewy occupies a middle position within the peer group. The stock trades at a discount to large-scale, diversified leaders like Amazon and Walmart across key valuation metrics, including trailing and forward P/E, forward EV/Sales, EV/EBITDA and price/cash flows, reflecting its lower margins and narrower business model. However, it commands a premium relative to specialty retailers like Petco, supported by stronger execution, a more advanced digital platform, and better cash flow generation. The market views Chewy as a mid-tier business with improving profitability, not as a high-growth technology platform or a structurally challenged retailer.

Analysts remain bullish about CHWY as the company is strengthening its business through rising Autoship sales, which are driving higher recurring revenue, improving demand visibility, and increasing customer lifetime value. At the same time, expanding EBITDA margins and solid free cash flow are enhancing financial flexibility, allowing the company to reinvest in growth and higher-return initiatives.

Additionally, its move into integrated pet healthcare, including the acquisition of Modern Animal, positions Chewy to capture higher-margin services, deepen customer relationships, and build a more differentiated, vertically integrated platform.

Street consensus implies roughly 51% upside from current share levels, with more bullish forecasts implying an upside of around 78%. This optimism is reinforced by discounted cash flow analysis, which indicates that CHWY shares may be trading at an estimated 54% discount to intrinsic value, suggesting meaningful valuation support for investors.

In FY25, Chewy returned $257 million to shareholders through share repurchases and has approximately $250 million remaining under its existing authorization. The company’s Board of Directors has since approved an additional $500 million increase to the program, significantly expanding its buyback capacity. This move reflects management’s confidence in Chewy’s long-term strategy, strong free cash flow generation, and disciplined approach to capital allocation.

Investing Takeaway

From a value perspective, Chewy appears to be a business undergoing a market re-rating rather than a structural deterioration. While growth has moderated, the company continues to strengthen its fundamentals through recurring revenue, rising customer monetization, and expanding margins. Its shift toward higher-margin healthcare and private-label offerings, combined with strong free cash flow and disciplined capital allocation, supports improving profitability over time. Despite this, the stock trades at a meaningful discount to its historical valuation and intrinsic potential, suggesting that much of the near-term uncertainty is already priced in. For long-term investors, this disconnect between fundamentals and valuation presents an attractive entry point.

Category: Smart Value