Chewy's cost discipline and margin improvement could achieve a share price of $53 (CHWY)

In view of Chewy's (NYSE:CHWY) strong cost discipline and above-average EBITDA outperformance this year, Morgan Stanley sees a path for the pet supplies retailer to achieve EBITDA of over $750 million and a share price that could more than double from the current price Level.

“Chewy is our favorite name in SMID e-commerce,” says Morgan Stanley, “and we see increased probability for our elevated bull case valuation of $53 with $800 million EBITDA in FY25 and more than $1 billion in FY26” as the company's future margin trajectory remains “compelling and underestimated.”

Morgan Stanley argues that Chewy (CHWY) has already demonstrated its ability to cut costs from the business by forecasting ~120-140 basis points of EBITDA margin expansion in fiscal 2024 despite lower revenue growth, and continues to target these cost initiatives going forward. Morgan Stanley believes $750M+ EBITDA is achievable without faster revenue growth, and considers the path to be “surprisingly achievable” with 50 basis points of gross margin expansion, 54 basis points of SG&A leverage, and 20 basis points of lower marketing intensity.

While there are risks associated with Morgan's optimistic forecast, including a worsening macroeconomic environment, costs associated with the rollout of a larger veteran version and an environment of increased promotional activity, most of the company's forecasts are conservative, even if the stock is more expensive than its peers on a growth-adjusted basis.

“We continue to view CHWY’s valuation as attractive, particularly as the company has historically often justified a premium due to its best-in-class cohort dynamics, robust end-market and leading market share in an oligopolistic industry structure,” says Morgan Stanley.

The company reiterated its “Overweight” rating and its current price target of $33.

Chewy (CHWY) shares are +3% in premarket trading and is close to ending a 5-day losing streak. Other names in the pet category were flat or down in premarket trading on Friday.