Not every growth stock in the market is a high-flying stock with a triple-digit share price. In fact, some of the best opportunities in the market are stocks with relatively modest share prices right now.
If you’re just getting started investing, you may want to take a closer look at Chewy (CHWY +2.08%). Its beaten-down stock price doesn’t reflect the massive earnings growth opportunity ahead. Here’s why it’s an absolute no-brainer growth stock to buy with just $30.
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A transformational company
Chewy is the leading online retailer for pet products, and it’s showing strong momentum in three key areas that will drive significant earnings results over the long run.
First is the company’s Autoship program. Autoship, as the name implies, is Chewy’s subscription service that automatically sends fresh food and supplies to customers’ doorsteps every month (or as often as the customer chooses). Not only does it lock in customers, but it also makes managing inventory and combining shipping for multiple products much easier. As a result, it keeps one of Chewy’s biggest expenses low. Eighty-four percent of Chewy’s sales came through Autoship orders in the fourth quarter, up from 80.6% a year ago.
The second area is its retail media advertising business. Chewy Ads is seeing strong momentum driven by its first-party data and highly engaged audience. A large portion of ad-attributed purchases are Autoship orders, CEO Sumit Singh said on the company’s fourth-quarter earnings call. That means advertisers can receive a very high return on their investment that translates into months or years of customer orders. The rise of the high-margin advertising business has helped push overall operating margin higher over the last few years.
The last area of growth for Chewy is its healthcare business. Chewy had 18 Vet Care clinics around the country as of early April, and it recently added 29 more with the acquisition of Modern Animal. The clinic business operates at a higher margin than the current retail business (although Chewy is exhibiting strong operating leverage). More importantly, it provides another way for Chewy to draw in customers and keep them in its ecosystem. It tightly integrates the clinics with its online pharmacy, enabling quick prescription fills and auto renewals combined with over-the-counter medications and retail orders in Auto shipments every month.
Chewy’s flywheel
The three factors combine to produce a flywheel of growth, whereby management can produce strong operating margin expansion over time. While the core business might exhibit relatively slow top-line growth for a growth stock, the company’s bottom line should grow much faster as it expands its operating margin over the next few years. Chewy’s adjusted EBITDA margin was 5.7% last year, up from 4.8% the year before. Management expects its EBITDA margin to expand at a similar rate this year, and it maintains a long-term goal of reaching a 10% EBITDA margin. That means EBITDA would grow 75% even without any revenue growth.
With the stock trading for just $27, the company’s enterprise value of $10.5 billion is just 11.4 times the midpoint of management’s EBITDA guidance. That makes it an incredible opportunity for investors right now.
