Chewy Cut to Equal Weight at Morgan Stanley on Valuation

Morgan Stanley analysts, led by Lauren Cassel, cut their rating on pet-supply retailer Chewy to equal weight. They're concerned about the current valuation but are bullish long term.
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Chewy’s  (CHWY) - Get Report shares fell on Friday after Morgan Stanley analysts downgraded the stock of the online pet-product retailer to equal weight from overweight, citing its valuation.

The stock nearly doubled from its March 12 low through Thursday. The analysts, led by Lauren Cassel. wrote in a report that Chewy is the second-best performing Internet stock year to date, after meal-kit provider Blue Apron Holdings  (APRN) - Get Report.

Chewy’s surge came amid forecasts for strong sales, as consumers, who are forced to stay home by the coronavirus pandemic, do their pet shopping on the Internet.

“This year has played out better than we expected,” the analysts said.

Chewy’s price-to-sales ratio is 3.69, up from 2.52 a year earlier, according to Morningstar.

“Tactically, we see a more balanced risk-reward near-term,” the Morgan Stanley analysts said. “However, long-term, we continue to be bullish and could look to reupgrade the stock on a pullback.”

As for the near term, “incremental data points from here could be less bullish,” the analysts wrote. 

The Dania Beach, Fla., company may see its margins pressured, given the shift toward consumable products and new customers, they said. Inefficiency at its distribution centers also may be a problem.

Revenue growth could slow in the second half of the year, as consumers work through their purchases from the first half, the analysts wrote.

Their share-price target is unchanged at $41.

Chewy shares recently traded at $41.73, down 7.1%, compared to a 1.36% gain for the S&P 500 index. The stock has soared 42% over the past three months, while the S&P 500 has slid 14%.