Chewy (CHWY) is stepping up its use of artificial intelligence and automation in an effort to improve customer service and operational efficiency while it continues funding Chewy Health, Chewy Vet Care, fulfillment upgrades, and customer acquisition.

Recent AI and automation news has arrived after a tough stretch for Chewy shareholders, with the share price down 38.49% year to date and the 1 year total shareholder return declining 49.73%. Short term momentum has picked up again, with a 1 day share price return of 4.83% and a 7 day return of 8.36%, even as the 90 day share price return is still down 23.33%. This suggests sentiment may be stabilising as investors weigh new growth initiatives against earlier weakness.

If Chewy’s use of AI has your attention, it could be a good moment to broaden your watchlist with other AI focused companies using the Simply Wall St screener for 32 AI small caps

With Chewy stock down sharply over 1 and 5 years, yet trading at a discount to some analyst and intrinsic value estimates, the key question is whether this is genuine mispricing or the market correctly adjusting to slower growth expectations.

Most Popular Narrative: 33.7% Undervalued

Chewy’s most followed narrative points to a fair value of $31.05 per share, compared with the last close of $20.60, framing the stock as materially discounted based on long term forecasts and assumptions about its pet health and e commerce business.

Chewy's strategic expansions, such as opening new Chewy Vet Care Clinics, are expected to further penetrate the $25 billion vet services market, likely increasing revenue and active customer engagement in 2025 and beyond.

The migration to a 1P ad platform allows for enhanced advertising capabilities, including off site ads and new content formats like video, which could grow the sponsored ads business up to 3% of total enterprise net sales, positively impacting gross margins.

Want to see what underpins that fair value for Chewy? The narrative leans heavily on compounding revenue, rising margins, and a richer profit multiple. Curious how those pieces fit together?

Result: Fair Value of $31.05 (UNDERVALUED)

However, there are pressure points for the Chewy narrative, including modest active customer growth and a heavy reliance on Autoship for more than 80% of sales.

Another View on Chewy Using Market Multiples

While the Chewy narrative leans on future cash flows and analyst targets, current pricing tells a more cautious story. The stock trades on a P/E of 33x, compared with a fair ratio of 22.9x, the US Specialty Retail industry at 19.7x, and peers at 15.3x, which signals higher valuation risk if expectations slip.

For investors, that gap raises a simple question: does the current price reflect optimism that is already built in, or patience with a business still catching up to its potential earnings power?

Next Steps

If the mixed sentiment around Chewy has you thinking, this is the moment to look through the numbers yourself and move quickly to your own view. To weigh both the concerns and the potential upside in one place, start with the 2 key rewards and 1 important warning sign

Looking for more investment ideas beyond Chewy?

If Chewy has sharpened your focus on where capital works hardest, do not stop here. Consider adding fresh ideas to your radar so you are prepared for potential opportunities.

• Explore income potential with stocks offering relatively strong yields and resilient payouts using the 8 dividend fortresses.
• Search for quality companies trading below assessed value by scanning the 41 high quality undervalued stocks.
• Focus on resilience by looking at companies with robust balance sheets and fundamentals through the solid balance sheet and fundamentals stocks screener (47 results).

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.