TD Cowen Initiates Coverage on Chewy Stock with a Buy Rating, Shares Rise

TD Cowen recently initiated coverage of Chewy, an online retailer focused on pet products, assigning it a Buy rating with a target price of $38. Following this news, Chewy’s shares experienced a 2% increase in premarket trading.

Analysts from TD Cowen anticipate that Chewy will achieve around 9% annual revenue growth between fiscal years 2024 and 2029. They project that EBITDA margins will expand from 4.6% to 8.0%, alongside strong conversion of free cash flow during this period.

The firm conducted comprehensive analyses that highlighted several key points indicating Chewy’s growth potential:

1. Chewy currently commands a 7.9% share of the U.S. pet industry market, which is expected to rise to 8.7% by 2028.

2. If Chewy maintains its share of the U.S. pet e-commerce segment, its growth may exceed both management and consensus forecasts.

3. Proprietary survey data from TD Cowen indicated that the number of purchasers has increased both year-over-year and quarter-over-quarter in the third quarter of 2024 up to the present.

4. The survey also revealed that Autoship customers, who account for 50% of monthly buyers, spend 3.5 times more on the platform than those who do not use Autoship.

5. Additionally, 67% of pet owners continue to make most of their pet product purchases in physical stores.

TD Cowen projects that the U.S. pet industry will grow from $144 billion in 2023 to $192 billion by 2028, representing a compound annual growth rate (CAGR) of approximately 6%. Furthermore, e-commerce penetration in the pet market is expected to increase from 36% in 2023 to around 45% by 2028.

Analysts commented that the pet e-commerce sector is likely to grow at about a 10% CAGR from 2023 to 2028. They expect Chewy to maintain its e-commerce market share while also capitalizing on overall industry growth.

For fiscal year 2024, TD Cowen estimates Chewy’s total revenue to reach $11.8 billion, marking a 5.9% year-over-year increase, and falling at the high end of the company’s guidance range of $11.6 billion to $11.8 billion. This growth is primarily fueled by Autoship revenue, projected to be $9.2 billion, which represents a 9.0% year-over-year increase.

The number of active customers is expected to increase in the latter half of 2024, potentially reaching 20.7 million in the fourth quarter, driven by product enhancements and favorable market conditions.

For fiscal year 2024, EBITDA is projected to be $549 million, with margins expanding to 4.6% due to improved cost management in both cost of goods sold and selling, general, and administrative expenses.

In the long term, total revenue is expected to increase at an 8.6% CAGR from 2024 to 2029, propelled by the growth in active customers, robust Autoship performance, rapid expansion in Chewy Health, and the developing advertising sector.