Chewy (NYSE:CHWY) shares gained more than 5% on Wednesday after the pet food and supplies retailer was upgraded by Bank of America analysts.
Analysts raised their rating on Chewy to ‘Buy’ from ‘Underperform’ and upped their price target to $40 from $24.
Shares of Chewy traded up 5.4% just shy of $35 late morning on Wednesday.
The bank’s analysts highlighted that adoption trends have steadily improved since the start of the year and pet spend appears to have bottomed.
“Easier comparisons in the first half of fiscal 2025 and commentary from our recent pet expert call make us confident that industry can return to consistent low-single-digit percentage to mid-single-digit percentage growth,” they wrote.
“Encouragingly, Chewy web traffic has accelerated significantly (up 6% year-over-year in Q3 versus negative 11% in Q1) and is supportive of share gains & possibly better than expected customer count (key stock metric).”
The Street is underestimating Chewy’s earnings power, analysts believe.
They project 2025 and 2026 EBITDA of $719 million and $917 million, above Street estimates of $675 million and $848 million respectively.
“Improving industry data should lead to accelerating topline trends and stronger earnings leverage for Chewy, which we think the Street is likely underestimating,” they wrote.
“Since cost cuts in late 2023, Chewy has demonstrated strong expense discipline in selling, general and administrative and has scaled fulfillment expenses. Combined with a shift to higher gross margin sales (advertising & health), we think there is an opportunity for significant earnings growth in the coming years.”
Analysts added that they believe investors will be willing to pay a premium for Chewy, particularly in the context of persistent discretionary headwinds in eCommerce.
“Chewy's subscription-like model, low exposure to discretionary categories (also minimizes China tariff exposure), and historically consistent trends within the pet category also add to revenue/earnings visibility,” they wrote.
Top risks to their rating include limited share gains from competition, international expansion pressuring margins, and potential tariffs extending discretionary pressures.