On Thursday, RBC (TSX:RY) Capital Markets adjusted its outlook for Chewy Inc . (NYSE: NYSE:CHWY) shares, increasing the price target to $42 from the previous $39, while retaining an Outperform rating on the stock.
The move comes after a detailed analysis of the company's fourth-quarter performance and future prospects. According to InvestingPro data, CHWY has demonstrated strong momentum with an impressive 48.1% return over the past six months, while analyst targets currently range from $24 to $42.
The firm's decision to boost its price target was influenced by Chewy's strategic choice to increase advertising expenditure to expand its active customer base. This initiative, according to RBC, indicates a strong potential for revenue growth, despite the fact that the increased spending led to fourth-quarter margins falling short of investor expectations.
With a current market capitalization of $13.66 billion and a P/E ratio of 36.59, InvestingPro analysis suggests the stock is trading near its Fair Value, with 14 additional exclusive insights available to subscribers.
RBC has revised its estimates for Chewy's financials based on recent developments. For the fourth quarter, the firm now expects net sales growth to reach 12.6%, up from the previously forecasted 11.9%.
However, the adjusted EBITDA estimate for the same period has been reduced to $119 million from $127 million, primarily due to the higher advertising expenses. Recent InvestingPro data shows the company maintains healthy financials with a gross profit margin of 29.19% and sufficient cash flows to cover interest payments.
Looking further ahead, RBC's projections for Chewy in the years 2025 and 2026 have also been updated. The analyst projects net sales growth of 3.8% and 8.6% for 2025 and 2026, respectively, with a slight adjustment from the earlier forecast for 2025. The anticipated adjusted EBITDA for these years has been raised to $686 million and $881 million, up from the previous estimates of $662 million and $808 million.
The revised price target of $42 is based on approximately 20 times RBC's adjusted EBITDA estimate for 2026, which stands at $881 million. This valuation reflects RBC's confidence in Chewy's potential for sustained growth and profitability in the coming years.
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