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Any doubts about owning Chewy (NYSE: CHWY) stock right now are certainly understandable. The United States’ pet-ownership rate slipped from 70% of households to 66% last year, according to the American Pet Products Association (APPA), which may have something to do with the cost of taking care of our “furbabies.” A recent poll taken by USA Today indicates that 91% of the nation’s dog owners — America’s favorite pet — have suffered some degree of financial stress taking care of their pooches. In this vein, BNP Paribas’ packaged food analyst Max Gumport notes the 11% increase in pet food prices since last year is responsible for the 3% decline in the country’s spending on premium pet food for the three-month stretch ending in July.

It all seems to point to trouble for online pet supply store Chewy. These headwinds may even be a key part of the reason Chewy shares are down more than 80% from their early 2021 peak, reaching a new 52-week low (and nearing a record low) just this week.

There are four reasons why, however, this stock’s steep sell-off in the middle of seemingly bad news is actually a great buying opportunity.

Four reasons Chewy stock is a buy

1. Chewy is often the low-price leader

Consumers may be adapting to inflation by buying cheaper stuff … and less of it. It’s a dynamic, however, that actually works in Chewy’s favor. See, Chewy’s prices are often the best prices, beating brick-and-mortar retail prices.

The key to these low prices isn’t what Chewy does but rather, what it doesn’t do. It doesn’t operate increasingly expensive brick-and-mortar stores. It was built from the ground up to be — and only be — an online pet supply store. So, not only does it not pay high rent for retail space, but its distribution and fulfillment framework is optimized for online shopping.

2. It’s also convenient

And that optimization is no small matter.

As is the case with most other consumer product categories, the world’s doing more and more shopping online. Market research outfit Packaged Facts reckons Americans spent $30.7 billion on their pets online last year, and Nielsen believes that figure will grow to the tune of 20% to reach $36 billion this year, easily outpacing the overall pet market’s growth.

And yet, there’s still plenty more room for growth. Packaged Facts’ numbers indicate that only 36% of the United States’ pet-supply sales are currently done online. By 2026, that proportion is expected to reach 45%.

3. Actually, people are still pet-crazy

OK, the number of U.S. households with a pet fell last year. Don’t read too much into the setback though. That 66% is still in line with long-term norms, and people who still own pets are still in love with them. Vericast’s 2023 Retail TrendWatch reports says three-fourths of the nation’s pet parents see their critters more like a child than a pet. As such, they still intend to spend more on their furbabies in the foreseeable future. A separate poll taken by ValuePenguin indicates a little over three-fourths of the United States’ pet owners would go into debt to save their animal’s life.

To this end, although consumers may be spending their money differently due to higher costs, the APPA still estimates this year’s total domestic outlays on pets will reach $143.6 billion, up nearly 5% from last year’s tally.

4. The company’s ongoing growth proves reasons 1 through 3

Finally, nothing speaks louder than results, right?

Despite the tough economic landscape, Chewy’s top line is projected to grow more than 11% this year and then grow another 10% next year en route to more than $18.5 billion worth of expected revenue by 2027. Perhaps even more notable is the fact that this sales growth is expected to push the company back into the black next year. The year after that, per-share profits are projected to nearly triple.

Data source: Chart by author.

That big swing back to profitability followed by yet another big bottom-line jump will almost certainly be a bullish catalyst for the stock.

It could be a bullish catalyst before the numbers are even officially reported, in fact. Remember, the stock market is usually forward-looking, pricing stocks based on their underlying company’s plausible future rather than its past. Chewy’s future looks pretty bright even if the stock’s recent performance isn’t all that great.

The kicker: Over 20% of Chewy stock’s float is currently sold short, setting the stage for a serious short squeeze. Shares just need the right nudge. If and when they get it, the ensuing rally could take shape in a hurry.

Primed for a bullish reversal

So if Chewy is so great, why is the stock still sinking?

There’s no need to dance around the issue; this stock just got too overheated during and because of the COVID-19 pandemic. People not only found joy in finding a new pet (the APPA reports pet ownership rates grew from 67% to 70% in 2020), but some bored consumers turned to stock trading for entertainment. Many of these new investors found and fell in love with the premise of Chewy. Not enough of these buyers, however, cared to consider those pesky details like valuation and plausible growth prospects. As reality seeped in, so did the selling.

It’s also possible that Chewy stock went through the same pattern so many other newly minted stocks do following their initial public offerings. That is, a huge post-IPO run-up driven by hype followed by an equally huge pullback as the company’s earliest investors cash-out.

This pattern may have already run its full course with Chewy stock though. Shares are suspiciously back near the major lows made in late-2019 and mid-2022, although not meaningfully below these lows. It could be a sign that investors are drawing a line in the sand there, so to speak. If that’s the case, don’t be surprised if this stock’s near or at a major bottom.

It’s also arguable that Chewy stock has become a target of organized short-selling. The immediate impact is bearish, but sooner or later these sellers will have to buy the stock back to exit their trades. That’s bullish. It’s just a matter of when and at what price.

Yes, Chewy shares are still ridiculously expensive. The stock’s valued at 180 times last year’s per-share profits of $0.12 and more than 130 times this year’s expected profit of $0.16 per share. You can find much cheaper investment options.

This isn’t a valuation-based pick though … at least not yet. It’s a story about the growth stock of a company with a history and prospects to support the stock’s potential recovery from here.

There’s risk to be sure. Indeed, it’s not the right kind of pick for everyone’s portfolio. The biggest risk here, however, isn’t a lack of long-term upside potential. It’s just the sheer risk of continued volatility. If you can stomach that for a while, Chewy’s actually a compelling prospect for the risk-tolerant sliver of your investable capital.

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James Brumley 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.

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