Shares of pet food e-commerce leader Chewy (NYSE: CHWY) were plunging today, down 5.3% and reaching an ignominious 52-week low.
There wasn’t too much in the way of company-specific news today. However, as a growth stock that is highly dependent on consumers continuing to buy pets and then buy more products for them, the stock wasn’t helped by today’s weaker-than-expected consumer sentiment survey from the University of Michigan.
Oh, and widely followed stock commentator Jim Cramer had a pessimistic take on the stock on his show last night, too.
On Friday, the University of Michigan released its September Consumer Sentiment survey, and the results came in weaker than expected. The survey had a reading of 67.7, which was up from a year ago but down from August’s 69.5 reading, and below economists’ estimate of 69.
Declining sentiment put a damper on any consumer-related stock today, and really on the entire broader market. When combined with today’s higher interest rates, it was especially tough for growth stocks in the consumer space that don’t earn much in the way of profits today, such as Chewy.
Unfortunately, that took down Chewy stock, which had been reeling throughout the summer, having already fallen nearly 30% in the month of August alone. The stock now trades at 52-week lows, even below its 2019 IPO price of $22.
On its earnings call last month, Chewy did note weaker sentiment across its customers, who traded down in terms of product selection, with weak pet household formation causing a decline in active customers. High inflation and general caution over the economy were the culprits. So, today’s lower-than-expected consumer sentiment survey only reinforced that message.
In addition, CNBC host Jim Cramer said on his show Thursday night that he was “astonished that it’s doing this poorly,” and that the “whole pet combine is in the doghouse.”
It’s difficult to know what to do with a stock many investors love and use a lot, especially if they have pets. However, the market is being quite unkind to any stock that doesn’t generate material profits today.
Chewy has long had either a tiny net income margin or slightly negative margins, as it has traditionally reinvested in long-term growth. But now that interest rates are higher and consumer sentiment is down, causing growth to stagnate, investors are increasingly unsure of its ultimate profit potential. And in the long run, profits matter in determining a stock’s intrinsic value.
Analysts are generally optimistic, with an average price target of $36.70, reflecting an 82% gain from these levels. However, analysts also seem to have been caught off-guard by the company’s slowdown this year. Therefore, there are a wide range of outcomes here.
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Billy Duberstein has no position in any of the stocks mentioned. His cleints may own shares of the companies mentioned. The Motley Fool has positions in and recommends Chewy. The Motley Fool has a disclosure policy.
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