Top Investment Opportunity at Present: Chewy versus Freshpet
Pet businesses are booming more than ever before.
Pet adoptions surged during the pandemic, and spending on pets has persisted due to fashions like pet humanization, with an increasing number of Americans viewing their pets as children.
Two corporations that took advantage of this trend are Chewy (CHWY 3.53%) and Freshpet (FRPT 0.04%). Both stocks have mainly delivered robust growth, but they provide distinct ways to invest in the pet industry. Let's examine both of them to establish which is the superior investment choice today.
Business model: Chewy vs. Freshpet
Chewy is the leading e-commerce player in the pet industry, boasting a loyal customer base thanks to its autoship program, which regularly sends customers pet food and other supplies. Chewy offers a wide range of products, making it simple for customers to utilize it as a one-stop shop for all their pet needs.
The business has approximately 115,000 stock-keeping units (SKUs) across products and services from 3,500 of the top brands in the pet industry. Its product selection includes pet pharmaceuticals and pet insurance.
Freshpet, in contrast, sells fresh, refrigerated pet food. The company is most recognized for its refrigerated rolls of dog food, which are sold in branded refrigerators in supermarkets and pet food stores. It's a high-quality product, and it's tapped into the desire for pet owners to feed their pets better-quality food.
Freshpet's products are available in over 26,000 stores, and it's expanding in the U.S. and abroad while introducing new products.
It leads the category in its own brand, and its manufacturing facilities and branding create barriers to entry as well as a competitive advantage.
Both companies possess robust business models that have given them competitive edges. Chewy is the leading e-commerce player for pet products, while Freshpet dominates in fresh, refrigerated pet food.
Financials: Chewy vs. Freshpet
In recent financial reports, there's a notable difference between the two companies.
Chewy, which saw rapid growth early in its history, especially during the pandemic, has experienced a significant decrease in growth in recent quarters. In the second quarter, the company reported just 2.6% revenue growth, reaching $2.86 billion, with revenue growth declining over the last several quarters.
Many parts of the pet industry, including rival Petco, have experienced stagnant growth post-pandemic due to inflationary pressures and a reversal of the pet-spending boom during the pandemic.
Chewy did report strong profit growth, as its gross margin improved, and it controlled costs.
In contrast, Freshpet has bucked the broader trend in the pet industry, reporting 26% revenue growth to $253.4 million in the quarter, indicating the continuing strength of its business. In fact, that marked its 25th consecutive quarter of at least 26% growth. Additionally, Freshpet has also reported solid margin expansion, and its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) nearly doubled to $43.5 million.
Valuation: Chewy vs. Freshpet
Valuation is a crucial metric to consider when evaluating any stock.
Chewy currently trades at a price-to-earnings (P/E) ratio of 28, although this includes substantial stock-based compensation.
Freshpet, on the other hand, is more expensive, as it's valued based on its track record of growth. The stock currently trades at a P/E ratio of 170.
Neither company pays a dividend.
Which one is the better buy?
Both companies have promising long-term prospects in the pet-products industry, but Freshpet has the lead due to its much stronger growth rate.
The company has scaled up effectively with a newly built efficient manufacturing plant, and it continues to expand its product reach through new stores. Chewy, however, is finding it challenging to discover new growth avenues in the current market environment.
Freshpet may be the more expensive of the two stocks, but it's the better investment choice thanks to its strong growth.
Given the text, here are two sentences that contain the words 'money', 'finance', and 'investing':
- Investors looking to capitalize on the booming pet industry might consider buying shares of Chewy or Freshpet, two corporations that have been profiting from the trend of pet humanization and rising pet adoption rates.
- To make an informed investing decision between Chewy and Freshpet, it's essential to consider various financial factors, such as their growth rates, profit margins, and valuation metrics like P/E ratios, before choosing one over the other.
