Buy Chewy Inc. (CHWY) Stock Because It Won’t Stay Down

Online pet care supplier Chewy, Inc. (NASDAQ: CHWY) shares have been resilient throughout the coronavirus pandemic market sell-off of 2020. Shares actually hit all-time highs at the $39.63 Fibonacci (fib) level on March 30, 2020. The S&P 500 (NYSEARCA: SPY) plunged (-35%) at the lows of the panic in mid-March. Online commerce has seen unprecedented activity due to social distancing initiatives and mandatory stay at home lockdowns. Chewy will no doubt benefit from the lockdowns and should expect raised guidance on earnings. The question is whether the upside has been priced in or set up for the next leg up.

Solid Growth Acceleration in Pandemic

Chewy reported strong Q3 2019 growth indicating 40-percent next year-over-year (YoY) growth at $1.23 billion and 33-percent YoY customer growth to 12.7 million. Net sales per active customer grew to $360, up 11-percent. Their subscription-based autoship customer sales composed 70.4-percent of total sales. Gross margins were 23.7-percent, growing 410 basis points YoY. All eyes will be on the forward and FY 2020 guidance on their Q4 2019 earnings release. The autoship program provides a good level of transparency and predictable cash flow, which investors need during the pandemic. While brick and mortar stores and retail outlets have been disrupted and shuttered through state mandates and social distancing initiatives, Chewy operates purely online with delivery dispatch, which is a streamlined and frictionless model perfectly adaptable to the current environment.  

Earnings Expectations

Analysts are expecting Q4 2019 earnings to come in at -$0.12-per share on revenues of $1.345 billion. The COVID-19 pandemic kicked into high gear in March 2020 and analysts will want transparency on the expected surge in revenues and memberships moving forward. The company provides pet care products including medications. Pet pharmacy company  Petmed Express (NASDAQ: PETS) is a potential sympathy play on CHWY earnings reaction.

Potential Price Trajectories

CHWY shares have been buoyant to say the least making new highs during the market plunge. The company’s earnings outlook will determine if the price resilience was justified. Either a sell the news or next leg up outcome is expected. The rationale for a large guidance raise fits the rationale, the question is valuation. It all rests on the company narrative on the Q4 2019 guidance and conference call. The price trajectories for bot the upside and downside is derived from utilizing the rifle charts on both the weekly and daily time frames. CHWY has been in a bullish weekly pup breakout after triggering a daily market structure low (MSL) above 26.10 then forming a market structure high (MSH) trigger below $29.16 that never detonated. CHWY continued to squeeze higher surpassing the weekly upper Bollinger Bands (BBs) at $36.69. The weekly 5-period moving average (MA) support sits at 31.38. The daily stochastic peaked and slipped under the 5-period MA at $36.47. A nominal daily tightening pullback to the 15-period MA would target $32.37 fib. The upper daily BBs overlap the with $42.46 fib target if CHWY raises guidance forecasts with provides a bullish narrative.

 

 

Trajectories and Entries

There will be either a sell-the-news or next-leg-up reaction on CHWY forecasts. With that in mind, there are upside trajectories utilizing the fib extensions. The upside earnings spike can retest of the $39.63 high and 1.618 fib. If the market does reprice/revalue shares on updated guidance then a move towards the upper fib extensions could form to target $42.46, $43.97 and $46.10, the respective 1.27, 1.414 and 1.618 fibs. If a CHWY sells on guidance, then opportunistic entry levels present themselves at: $31.83 weekly 5pd MA, $29.16 MSH trigger support, and $26.10 daily MSL trigger level. Nimble traders can play reversions off the fib levels and longer-term holders may consider dollar-cost-averaging at the various entries. Share size allocation and holding period are the two risk exposure factors to be mindful of in the context of the macro market weakness. There is a possibility of the company pulling FY 2020 forecasts, which would be bearish on the shares since the resiliency and buoyancy of shares were likely due to the anticipation of good news. The management will have to present an upbeat conference call that will shape a bullish narrative and in turn galvanize position sentiment through this disruptive period as the company can emerge a leader. The autoship program combined with the diverse products and services are the embodiment of stickiness and the network effect