What a better way to kick off the dog days of summer than with the Chewy (CHWY) IPO?
This weekend, you'll likely see a surge in references to the infamous dot.com flop Pets.com that basically marked the top of that era. The comparisons are fun for nostalgia, but that's where it ends.
I should start by noting, I use Chewy.com. While I do support local pet business for some of our pet needs, one of our dogs needs a very specific food due to allergies. We previously bought it through our veterinarian until we discovered how much cheaper we could get it through Chewy AND have it delivered.
Convenience plus price, sign me up.
But that doesn't make me an automatic buyer of the stock. Not at these valuations.
Chewy priced its 46.5 million-share offering at $22 per share. The stock skyrocketed off Friday's open with the first trade at $36.
The stock crested just above $41 before selling off into the mid $30s. Another huge first-day mover.
Who knows where the valuation will ultimately end Friday, but it's most likely going to be in the ten-figures.
And I could almost justify that if Chewy were selling 46.5 million shares and receiving the $1 billion of proceeds, but it isn't. In fact, PetSmart is banking around 88% of the cash from the sale. Chewy will walk with somewhere between $120 million-125 million before fees. That's not a bad number, but with a net loss from operations of $267 million in 2018 and $57 million in negative free cash flow, it isn't going to take them very far.
The company did have $88 million in cash on the books according to the S-1 prior to the IPO. So, they aren't any near-term danger, but if the price surges post-IPO, don't be surprised to see an offering next spring.
The pet industry is a mammoth $70 billion market with $29+ billion in food and $15+ billion in supplies and OTC meds. This is Chewy's target, so with gross sales of $3.5 billion, there's plenty of upside potential. That revenue number is up 68% year over year while gross profit virtually doubled. Again, these are solid figures.
The real case for the bulls is how well Chewy is doing with acquiring customers and managing existing customers. Its active customer base grew 56% from 6,789 to 10,585 year over year. More importantly, the net spend per customer increased from $310 to $334 and the sales to existing customers grew 120%.
Currently, 65.7% of Chewy's customers are on auto-ship. This is as close to a subscription model as a business can get without an actual subscription plan.
There's a lot to like about a retail business growing sales at 68% while in the billions, but profitability appears to be at least a year out, if not a little more. EBITDA margins are significantly improving.
I believe Chewy is priced right in the $18 - $22 range, but I'm not willing to chase here as an investment. For action traders, it should make for a fantastic vehicle over the next month. Unfortunately, even if I see a lower price as attractive, there have been too many IPO squeezes of late to make shorting a consideration.
Trade it, don't own it, but I wouldn't consider shorting it at all.