Best Stock to Buy Right Now: Amazon vs. Chewy

Leo Sun, The Motley Fool

Wed, Oct 2, 2024, 2:15 AM 4 min read

Chewy was spun off from PetSmart and went public in 2019, but it's only risen 36% from its IPO price of $22 and trades 75% below its all-time high. Amazon's stock has rallied 118% over the past five years and is hovering close to its record high. Let's see if the e-commerce leader will continue to outperform the niche underdog as a long-term investment.

A smiling person takes care of a dog. — Image source: Getty Images.

The differences between Amazon and Chewy

Amazon is a larger and more diversified company than Chewy. Amazon initially only operated a first-party marketplace, but it subsequently launched a higher-margin third-party marketplace. It also acquired Whole Foods Market in 2017.

Amazon generates most of its revenue from its retail business, which operates in 22 countries and ships to more than 100 countries. It also locks more than 200 million members into its sticky Prime subscriptions -- which provide free shipping options, exclusive discounts, streaming media services, and other perks.

Amazon generates most of its profits from Amazon Web Services (AWS), the world's largest cloud infrastructure platform, and its smaller advertising unit. Those higher-margin businesses subsidize the expansion of its lower-margin retail business.

Chewy operates a third-party marketplace generating most of its revenue in the U.S., but kicked off its international expansion by entering Canada last year. The company served just over 20 million active customers at the end of its latest quarter.

Chewy mainly sells pet food and pet products, and it locks in its customers with free Autoship subscriptions that provide discounts for recurring scheduled orders. Its Autoship orders generated 78% of its total revenue in the first half of 2024.

Chewy faces a lot of competition from superstores like Walmart, e-commerce giants like Amazon, and even its former parent company PetSmart. To widen its moat and boost its margins, Chewy has been launching more private label products, expanding its own pet health insurance plans, and selling more digital ads across its marketplace.

Which company is growing faster?

From 2019 to 2023, Amazon's net sales grew at a compound annual growth rate (CAGR) of 20%. From fiscal 2019 to fiscal 2023 (which ended in January), Chewy's net sales rose at a slightly faster CAGR of 23%.

But Chewy's growth decelerated over the past three years as it failed to gain new active customers, and its net sales only rose 10% in fiscal 2023. Analysts expect its net sales to grow at an even slower CAGR of 6% from fiscal 2023 to fiscal 2026.

Chewy is trying to offset the lack of fresh customer growth by growing revenue per customer with its Autoship subscriptions, insurance plans, and ads -- but it's clearly running out of room to grow. On the bright side, analysts expect its earnings per share (EPS) to grow at a CAGR of 100% during those three years as it reins in its spending and buys back shares.

Amazon suffered a slowdown in 2022 as its retail business lapped its pandemic-driven growth spurt and faced fresh inflationary headwinds for consumer spending. But the company reversed that deceleration in 2023 with 12% net sales growth as those headwinds dissipated and the macro environment stabilized. From 2023 to 2026, analysts expect its revenue to rise at a CAGR of 11% as its EPS increases at a CAGR of 36%.

That growth should be driven by expansion of its marketplace into new overseas markets and robust AI tailwinds for AWS' cloud computing business. A warmer macro environment could also spur more ad purchases across its platforms.

The better buy: Amazon

On a generally accepted accounting principles (GAAP) basis, Chewy and Amazon trade at 34 times and 40 times this year's earnings, respectively. Amazon's stock might look pricier than Chewy's, but Amazon's business is also much larger, growing faster, better diversified, and has a wider moat. That's why I believe Amazon will still outperform Chewy for the foreseeable future.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Chewy, and Walmart. The Motley Fool has a disclosure policy.

Best Stock to Buy Right Now: Amazon vs. Chewy was originally published by The Motley Fool

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