On the first day of listing, shares of Chewy, Inc. (NYSE: CHWY) jumped 59.05% or $12.99 to close at $34.99, reflecting a market capitalization of $14.35 billion for the online pet products retailer. Notably, that figure is four times the price paid by PetSmart while acquiring Chewy in 2017.
On Friday, the company’s shares opened at $36.00 and recorded a high of $41.34, which is almost twice the IPO (initial public offer) of $22.00. One of the reasons that justify the extravagant valuation is the $70 billion US pet market, where several big companies operate.
The offering was priced higher than the range estimated by analysts. In fact, while divesting, the company fixed the floor price range of $19 to $21 for the stock, after raising it from $17 to $19 earlier last week. Still, PetSmart was able to offload more of its holding than it actually aimed for and at a higher price.
The divestment enabled Dania Beach, Florida-based Chewy, which sells puppy shampoo and cat treats, to raise $123.20 million, and PetSmart, which is looking forward to minimizing its debt, to amass $900 million.
PetSmart and BC Partners will have control over Chewy through Class B shares, which offers higher voting power.
With 11 million clients, Chewy is placing its bet on the “pet humanization” trend in which owners consider pets as part of their family and shower affection on them by lavish spending.
Jay Ritter, an IPO specialist and University of Florida’s professor, is doubtful whether Chewy’s market value permits further appreciation potential for investors.
Regarding the volatility of stock price, Ritter opined as follows: “The stock has been volatile on its first day of trading. I expect the stock to continue to be volatile.”
Private equity firm BC Partners owns PetSmart. The acquisition of Chewy by PetSmart resulted in the addition of $2 billion to the firm’s debt load. Chewy had disclosed that its revenue jumped about 68% y-o-y to $3.53 billion in 2018, while net loss was $267.9 million. In 2017, Chewy had posted a net loss of $338.1 million.
To justify the offering, in its sales pitch, the company stated that the industry is not affected during an economic slowdown. But, the market is extremely competitive. Chewy has to compete with retail giants such as Walmart Inc and Petco Animal Supplies Inc, in addition to Amazon Inc and PetMed Express Inc, an online seller.
Chewy commands a 45% market share of the online cat and dog food market, paralleling Amazon’s share, as per research firm 1010 data. In July 2018, Chewy entered its pharmacy business, which is generally considered the turf of veterinary doctors and their associates.
Phillip Cooper, an independent consultant who advises pet industry investors, said: “If (Chewy) can clear legal and registration hurdles, they’ll have no trouble competing out there. Chewy has a tremendous following at the consumer level … these guys know how many dogs people have, what their ages are and if you lose a dog they send a bouquet of flowers!”
The high valuation indicates that the stock will remain range-bound in the short-term.
Technically, the stock is range-bound between 34 and 36. The MACD indicator has a negative reading. As a result, we can expect the stock to move down in the short-term and retest the lower end of the trading range.
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