Chewy's Autoship and Rx Bolster Margin Narrative, But Valuation Remains a Stiff Hurdle

What happened

A Motley Fool article spotlights Chewy's Autoship and pharmacy businesses as critical for hitting margin targets, citing predictable sales despite leadership changes. However, the DeepValue report reveals that autoship already accounts for over 83% of sales, leaving limited room for further penetration to drive meaningful margin expansion. Chewy's Q3 FY25 performance showed 8.3% net sales growth and a 5.8% adjusted EBITDA margin, but this is priced into rich multiples of 63x P/E and 47x EV/EBITDA. Market sentiment is mixed, with concerns about logistics cost pressures and competitive discounts that could undermine margin progression. Thus, while the recurring revenue model provides stability, it may not suffice to justify current valuations without flawless execution on growth and profitability.

Implication

The emphasis on Autoship and Rx underscores Chewy's reliance on recurring revenue, but this segment is mature with high penetration, limiting upside. Margin expansion now depends on successfully scaling higher-margin services like vet clinics and sponsored ads, which face execution and competitive risks. Any stalling in autoship growth or EBITDA margins falling below 4.5% could trigger a downgrade and significant multiple compression. Given the elevated multiples, a prudent approach is to await either a lower entry price around $26 or clearer evidence of sustained high-single-digit growth with margin improvement. Key catalysts to monitor include upcoming FY26 guidance and progress on health ecosystem monetization.

Thesis delta

The news article reinforces Chewy's strategic focus on Autoship and pharmacy but does not alter the core investment thesis that the stock is overvalued relative to near-term growth prospects. Investors should continue to wait for a better risk-reward setup, either through price depreciation or confirmed margin expansion above 6.5%.