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Stocks of the Week!

In this email:

• Who’s A Good Stock! 🐶 🐾

• Make Money From Your Phone 📱

Who’s A Good Stock! 🐶 🐾

Imagine a meme stock with decent fundamentals. That’s what we have here.

Chewy (an online pet retailer) was given meme stock status after the guy behind the GameStop rallies tweeted this out back in June to let everyone know he’s got a near 7% position in the company.

He’s since closed those positions but Chewy just dropped its Q3 earnings & it’s got me interested.

THE FETCHING NUMBERS

📦 Revenue: $2.9 billion, up 4.8% Y/Y. $21M more than analysts expected.

💸 Free Cash Flow: $152 million in Q3, up 218% YoY. Free cash flow margin now sits at 5%. That means Chewy’s keeping a shiny $0.05 coin for every dollar they bring in. Doesn’t sound like much but it’s actually pretty good for a low-margin online retailer.

🛒 Transactions Per Customer: Up 4% Y/Y. Good to see organic growth & an easy win. It means customers are shelling out more on squeaky toys & kibble on an average purchase.

Great. Now how does that all translate into us making money? And why does it make Chewy a potential “buy”?

CHEWY’S BIG DOG VALUE 🐕️ 

We don’t want stocks that are all bark & no bucks. (Are you sick of the dog puns yet?)

Here’s where Chewy get’s super interesting.

Chewy’s P/E ratio sits at 25.6X. That’s way below it’s 3-year average of 81.7X. It’s also way cheaper than its competitor, Petco (P/E: 90X). Take in to account Chewy’s long-term EPS growth is projected at 40%+ & it looks like a serious bargain.

Using those numbers, it leaves us with a fair value range somewhere between $37.50–$40. That’d be a 24% gain from current price.

Technical analysis shows them on a solid uptrend since August with a stream move of higher highs & higher lows, gaining nearly 80%. We’re currently on the pull back of a recent high so theory says we should be look for a move back up.

There’s another really interesting revenue stream Chewy are eyeing up.

Vet clinics! It makes perfect sense with a customer base that will 100% need a vet at some point. A space like this would drive revenue but it’d also likely have much juicier margins.

THE RISKS 🚨 

There’s really great upside potential based on value. Solid top line growth. Amazing.

But let’s not forget. This is an online retailer in a super competitive (low margin) business. Think Amazon. Think Walmart. There’s some big dogs that play here. With big reach & bigger pockets.

How can Chewy compete?

By using a personal touch. A tailor-made shopping experience using things like their autoship program. I think of any demographic, pet owners would be most likely to appreciate something like that. And investing in a vet service for a one stop shop customer experience for all their pets needs should help them breakaway from a generic pet retailer vibe.

MY PLAN 🗺️ 

Chewy didn’t completely crush earnings (missed EPS by $0.03), but the growth story is alive & wagging. Customers are spending more, free cash flow is popping off, & a sticky customer base (who’s cancelling their dog’s food subscription?)

The numbers tell me it’s super undervalued too. I think it’s worth a tiny part of the portfolio. I’ll look to add something like 0.5% of the portfolio & keep a close eye on them to make sure they keep it up.

There’s always that meme stock lottery ticket in our back pocket with this one too. With any luck, Roaring Kitty will tweet it out again & send it up 30% in a single day like last time….

Make Money From Your Phone 📱 

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*The Deloitte rankings are based on submitted applications and public company database research, with winners selected based on their fiscal-year revenue growth percentage over a three-year period.
*Please read the offering circular and related risks at invest.modemobile.com.

That’s all! See you same time next week 👋 

P.S Hit reply & let me know what you thought of this weeks newsletter. All feedback is welcomed ❤️