Petstocks like Chewy, Inc (NASDAQ: CHWY) and Freshpet (NASDAQ: FRPT) are down significantly from their highs, but the bad times are over. Industry trends and consumer habits are coming back into alignment, putting these discretionary stocks in great shape for the year. Industry experts forecast a 6% CAGR for the pet industry over the next 5 to 10 years, a trend compounded by operational improvements for each. Both companies have worked to improve revenue and operational quality and are expected to widen margins and leverage their bottom-line growth.
Chewy, Inc. is well-positioned to benefit from spending trends
Chewy, Inc. share prices hit a multi-year low ahead of its Q3 results, producing a high-volume stock price bounce. This action has it set up to rebound with a possible 100% gain in sight. The Q3 results were tepid, and guidance was cautious but largely aligned with expectations for improvements in 2024. Takeaways from the report are industry growth in the high single digits compounded by wider margins and an increase in market share.
Among Chewy’s strengths is its digital footprint; pet industry data suggests more than 80% of pet owners shop online, providing a large addressable market. Because Chewy.com is leaning into categories that consumers want most, it is deepening the penetration of its existing customers while attracting new ones. Another of its strengths is its auto-ship feature, which generates substantial recurring revenue via sales of nutrition, health and wellness products.
The stock trades with a high valuation relative to 2024 estimates but has a healthy growth trajectory. The P/E multiple falls to 35X the 2025 estimates and more in 2026, making it a reasonably valued growth stock. Regarding 2024, Chewy analysts expect revenue growth to be near 5%, aligning with market trends, and earnings to be near 20%.
Regarding the analysts' sentiment and price target, the 23 analysts tracked by Marketbeat.com rate the stock a consensus Moderate Buy with a target of 38% above recent action. The bad news is that the price target is falling, but offsetting factors exist. An outlier is dragging the consensus down; the $16 low target is well below the range of targets centered around the consensus.
Freshpet analysts lead the market higher
Freshpet is trading off of its multi-year lows, led higher by analysts. The 13 tracked by Marketbeat rate the stock as a Moderate Buy and have raised their price targets throughout 2023. The consensus coming into 2024 is $88.50, only 2% above the year’s opening trades, but it is up 15% YOY and moved higher in the last month of 2023. December analyst activity includes three initiated coverages with a consensus of Moderate Buy and a target of $91.30, slightly above the consensus of $88.50. Notably, the lowest target on record is $65, but was set early in 2023.
If not the leader, Freshpet will be one of the pet food stars in 2024. It has spent the last two years improving operational quality, efficiency and supply chain/delivery, setting itself up for sustainable, market-leading growth. Analysts expect to see revenue jump by 25% in 2024, outpacing the industry by 2000 basis points, and they may be cautious. Freshpet is uniquely positioned in the nutrition segment, the largest and among the fastest growing, so it may exceed this forecast.
Institutional activity has been robust for the last five quarters, with net activity distinctly bearish in the first half of 2023, then turning bullish in the second. That shift coincides with the stock price bottom and a reversal on track to continue in 2024. The latest action has the market at a two-year high and testing critical resistance that will likely break. The next target for critical resistance is near the $118 level and may not fall easily.
