Piper Sandler upgrades Chewy ahead of Q2 earnings with a $35 target: Should you buy?

On Friday, analysts at Piper Sandler's upgraded Chewy (NYSE: CHWY) to an Overweight rating with a raised price target of $35, up from $22, in a strong vote of confidence in the online pet retailer's prospects.

This 31% potential upside reflects the firm's belief that Chewy is at a critical inflection point in its profitability.

The upgrade, led by analyst Anna Andreeva, is largely driven by improvements in Chewy's gross margins, attributed to a favorable revenue mix shift towards higher-margin streams and controlled discounting in Q2 2024.

Additionally, the company's focus on automation and efficiency gains is expected to enhance SG&A leverage, positioning Chewy well for the coming quarters.

JPMorgan and Argus's opinion on Chewy

JPMorgan also maintains a positive outlook on Chewy as it approaches its Q2 earnings report on August 28.

On Thursday, analyst Doug Anmuth reiterated an Overweight rating, highlighting Chewy's dominant market position as the largest pure-play online pet retailer in the U.S., with approximately 33% market share.

Anmuth points to the growing penetration of the online pet market, currently at 36%, as a long-term tailwind for Chewy.

He emphasizes the strength of Chewy's Autoship subscription program, which accounts for about 75% of net sales, as a key competitive advantage.

With improving website visit growth and potential conservatism in Chewy's full-year outlook, JPMorgan's $28 price target suggests continued optimism about the company's trajectory.

In contrast, Argus took a more cautious stance in July, downgrading Chewy from Buy to Hold due to concerns about valuation and the broader economic landscape.

While Argus remains bullish on Chewy's long-term prospects, especially its non-discretionary pet products and Autoship revenue model, the downgrade reflects short-term challenges.

These include a declining active customer base and anticipated substantial investment spending in Chewy's Canadian expansion.

Argus also highlighted the risk of supply chain disruptions and noted that Chewy's valuation, despite its strong fundamentals, appears stretched compared to peers like Petco and Walmart.

This cautious approach is grounded in the belief that Chewy's shares are fully valued at current levels.

Chewy's Q2 earnings preview

Looking ahead to Chewy's Q2 earnings, analysts expect the company to report earnings of $0.03 per share on revenue of $2.856 billion. This growth is supported by Chewy's strong market position and recurring revenue model, which provides a steady income stream.

Despite the slower revenue growth compared to the pandemic boom, Chewy's focus on profitability and margin expansion has started to pay off. The company's ability to manage its costs while driving incremental revenue growth is a positive indicator for long-term investors.

Chewy's business is underpinned by several growth drivers, including the ongoing shift to e-commerce, the expansion of its pharmacy business, and international growth initiatives like its move into Canada.

These factors are complemented by the company's efforts to diversify its product offerings, including pet health insurance, which is expected to further enhance margins.

However, Chewy also faces headwinds such as a softening consumer environment, particularly in discretionary spending, and intense competition from giants like Amazon and Walmart.

Now, let’s see what the charts have to say about the stock’s price trajectory, as we delve into the technical analysis to assess whether the recent bullish sentiment is supported by the underlying price action.

Strong support near $21.3

Although Chewy’s stock has seen an extended downtrend since early 2021 when it was trading above $110, it has managed a decent bounce back this year. Starting the year near $16, the stock reached a high of almost $40 in late June amid the euphoria surrounding the return of Roaring Kitty.

Source: TradingView
They retraced significantly after making that high but have again bounced back in the past few weeks and are displaying bullish momentum in the short-term and medium-term charts.

Hence investors bullish on the stock can initiate a long position at current levels but must pay close attention to $21.3, which is the swing low where the stock has taken support multiple times since the start of June. If the bullish momentum remains, the stock can reach the $34.9 level soon.

Traders who are bearish on the stock must refrain from shorting it at current levels and should initiate a short position only if it gives a daily closing below $21.3.