On Tuesday, William Blair maintained a positive stance on Chewy Inc . (NYSE:CHWY), reiterating an Outperform rating on the company's stock. The firm expressed confidence in Chewy's prospects, countering the perception that the active customer growth has stalled and arguing that the market is undervaluing the company's potential for long-term free cash flow.
According to the firm's analysis, Chewy's shares are currently trading at a modest valuation, slightly above 1 times projected 2025 sales and 18.5 times the initial estimate for out-year free cash flow, which is anticipated to be around $700 million.
This valuation, they argue, does not fully reflect the company's conservative top- and bottom-line growth outlook, which includes a target for adjusted EBITDA margins to reach or exceed 10%.
William Blair projects that Chewy's run-rate free cash flow could approach $1 billion within the next three years. This expectation is based on a forecasted recovery in active customer growth and potential gains from platform advertising and healthcare services, including insurance.
The firm suggests that if these projections hold, Chewy's stock could potentially reach a price between $50 and $60, assuming a sales multiple around two and a free cash flow multiple in the low- to mid-20 times range.
The firm also notes the defensibility and visibility into Chewy's cash flow, largely due to its 75% auto-replenish business model, which could contribute to a higher valuation.
Despite this optimistic view, William Blair cautions that the stock could be at risk from speculative trading, which might deter long-term investors and offer limited protection against market volatility.
InvestingPro Insights
Chewy Inc. (NYSE:CHWY) appears to be navigating through a complex market with a mix of challenges and opportunities, according to recent analysis. InvestingPro data provides a deeper dive into Chewy's financials, revealing a market capitalization of $11.09 billion and a robust revenue growth of 7.19% over the last twelve months as of Q1 2023. Despite this growth, the company's high P/E ratio of 132.78 suggests a significant expectation of future earnings growth priced into the stock.
InvestingPro Tips indicate that Chewy holds more cash than debt, which is a positive sign for financial stability. Additionally, analysts are optimistic about the company's net income, with six analysts revising their earnings upwards for the upcoming period. This aligns with William Blair's positive outlook and may support their projection of Chewy's free cash flow approaching $1 billion in the next few years. Furthermore, Chewy's stock has demonstrated strong returns over the last three months, with a 61.42% increase, showcasing investor confidence in the company's performance.
For investors looking to delve deeper into Chewy's financials and future prospects, InvestingPro offers additional insights and tips. Utilize coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription and access the full range of expert analysis and tips, including 14 additional InvestingPro Tips for Chewy Inc., which can be found at: https://www.investing.com/pro/CHWY
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