CHWY is undervalued; fair value of $34 vs current price ~$23 implies ~45% upside over 12-18 months.

On June 10th, Chewy informed investors it boasted over 21.5 million customers. That was up 3.6% year-over-year. And the net sales per active customer increased to $597.

Chewy has multiple times informed investors that the longer Chewy keeps a customer, the more they spend on the platform. And that's understandable because they become more familiar with the platform and the products and services that's being offered.

Additionally, Chewy is expanding into veterinary care, which is a high-margin, high-spend category with high loyalty from pet parents.

But does all of this make Chewy stock a buying opportunity? So, over the trailing 12-month period, Chewy reported $12.8 billion in revenue. That's up roughly 4x from 2019 when it reported $3 billion in revenue.

Overall, Chewy has estimated the pet market in the United States at over $100 billion in annual sales. That's not including the veterinary market, and that could add significant sums to that total addressable market.

Chewy is an e-commerce retailer, so it only has online operations for its retail products. Even though it's expanding into veterinary care, it's doing most of it through telehealth and relationships with existing clinics.

The recent acquisition in the category could also expand the company's physical presence in this category, which is a high-margin business.

Chewy's management team has done an excellent job boosting profitability over the long term. At 2.58% its operating profit margin is not all that great, but the trend of improvement is.

This is a capital-intensive business model, heavy fixed assets. Chewy owns a lot of the inventory it sells on the platform, plus it owns and operates the logistics networks to the products to pet parents in the United States and expanding into Canada.

That's a heavy fixed capital business model. It has high risk, but it also has higher reward potential. One of the factors that allows Chewy to improve margins is a large percentage of the sales on the platform are recurring, meaning customers order something and request that order to be delivered every 2 weeks or every month or every 2 months.

That allows Chewy to have more information about what its customers want, when those customers want, and where those customers need to be delivered. That information plays a huge role in business operations.

It makes it less risky for Chewy to create and order products, to work with its supply chain in order to get those products where they need to be on time. And that's allowing the business to operate more effectively.

Chewy's management team has also been above average in terms of executing on the business model according to my research on the company over the previous 7 years or so.

The returns on invested capital reached over 26%. And that's especially more important and encouraging when a business operates with the heavy fixed capital or heavy capital asset business model.

It's not an asset light business model. And so, the return on invested capital becomes more important for businesses that operate utilizing this model. At 26% the ROIC to WACC ratio is more than one to one and it's approaching over two to one.

In fact, I calculated a weighted average cost of capital at 12.7% for Chewy with a beta at 1.43. And so, if we look at 26.25% divided by 12.69%, you can see the company's ROIC to WACC ratio is just about two to one, a little over two to one, which is an excellent ratio especially for a business that's still in its early growth stage.

Overall, I calculated a fair value for Chewy stock at $34 per share and its current market price is just over 23. That means comparing the market price with the fair value leaves about 45% upside over the next 12 to 18-month period.

So, the valuation looked cheap using my discounted cash flow model. And using the forward price to earnings ratio, it also looks cheap. Chewy is trading at a forward PE of 12.6, which is relatively cheap for this kind of business with this kind of upside.

So, to answer the question I posed in the headline, yes, I do think Chewy stock is a buying opportunity at this market price at these levels. And I have a relatively medium conviction, a medium confidence level on this ranking.

At Chewy, I have a medium confidence level on my buy ranking.