How to Trade Chewy (NYSE: CHWY) Stock Today

Today we’ll walk you through a trade idea with Chewy Inc. (NYSE: CHWY) that could deliver up to 30% returns in the next 3-6 months.

Chewy Inc. provides pet food and treats, pet supplies and pet medications, and other pet-health products, as well as pet services for dogs, cats, fish, birds, small pets, horses, and reptiles through its chewy.com retail Website, as well as its mobile applications. It offers approximately 70,000 products from 2,500 partner brands.

Analyst Ratings

According to TipRanks, 12 analysts are offering 12-month price targets for CHWY in the last 3 months. Nine of those analysts rate it a Buy, three rate it a Hold, and none have a sell rating. The average analyst price target offered $109.10, which represents a 23.82% upside from the last price of $88.11.

Why CHWY is trending?

Since the pandemic’s onset, Chewy Inc. had attracted many new customers, as people preferred to stock up on supplies for their pets without leaving the comfort of their homes. Chewy reported 19.8 million active customers at the end of its fiscal first quarter, an increase of 31.6% from the same time last year. Boosted by the pandemic, the company’s annual revenue reached $7.15 billion in fiscal 2020, a 47% upside compared to the prior year.

The pandemic-induced tailwind now seems to be wearing off as economies reopened and customers started to visit their local stores again. Investors were concerned about how economic reopening would affect sales and customer acquisition, resulting in the recent decline in the stock price.

However, there is still a large percentage of customers who prefer to make purchases online. And this secular trend, where consumers are shifting their pet spending online, is anticipated to continue. CHWY stands to benefit significantly from this trend.

During Chewy’s fourth-quarter conference call, CEO Sumit Singh highlighted his belief that Chewy captured 57% of pure e-commerce sales of pet products in 2020.  And he believes that Chewy will go on to capture over 50% of all growth that will happen in the online channels in 2021.

The business is also expected to have further growth, thanks to the company’s focused offering and expansion into new product lines. Chewy has been moving into new product categories beyond pet food, treats, and accessories.

Its biggest current initiative is Chewy Health, which encompasses all of its healthcare and pharmacy offerings. Customers now have access to over-the-counter medicine, online veterinarian consultations, and prescriptions (what it calls Petscriptions). Over 7,000 clinics and veterinarian partners are now a part of Chewy Health, making it the most comprehensive online pet offering, currently unmatched by even retail giants like Amazon and Walmart.

Chewy has good long-term prospects, but challenges remain in the near term. The economic reopening is presenting more challenges than just a decline in sales growth. Thanks to the crunch in the labor market, Chewy reported having difficulty staffing fulfillment centers, and it had to increase wages to attract employees.

Moreover, the delta variant is causing an increase in COVID-19 outbreaks in manufacturing facilities, shipping ports, and other important logistical centers, causing a shortage of some products, and higher out-of-stock levels than usual. That’s costing Chewy sales, and if a customer has to go to a competitor instead, the company could potentially lose that customer.

The online pet retailer set to report its fiscal 2021 second-quarter earnings on September 1, which would be a litmus test on how the company would navigate a future without the boost from a global pandemic.

Here’s how to trade CHWY now.

CHWY Chart

On analysis, the daily chart of CHWY shows that there are multiple bullish indications for the stock.

#1 Stock on An Uptrend: The daily chart shows that the stock is currently on an uptrend, as it has been forming higher highs and higher lows for the past several months.

#2 Uptrend Channel: The daily chart shows that the stock has currently formed an uptrend channel, which is marked in purple color. CHWY has currently taken support near the lower rail and is moving higher, indicating that the stock may bounce higher.

#3 Trading Above MAs: The stock is currently trading above its 50-day as well as 200-day moving averages, indicating a bullish bias for the stock.

#4 IH&S Pattern: The daily chart shows that the stock has been forming an Inverted Head and Shoulders (IH&S) pattern. This IH&S pattern is marked in the chart in blue color. An IH&S pattern is a strong bullish pattern. Once the stock breaks out of this pattern, it could move higher in the short term.

However, there are also multiple bearish indications for the stock, like bearish Aroon, bearish MACD, and bearish stochastic.

Below is the bullish and bearish play for CHWY.

Recommended Bullish Trade (based on the chart)

Buy Levels: If you want to get in on this trade, you can purchase the shares of CHWY in the following scenarios.

• Buy Level #1: The first buy level for CHWY is above the price of around $93.00.
• Buy Level #2: The second buy level for the stock is above the price of $100.00.

Important Note: Make sure that you only enter the trade once the daily close is above the recommended price level.

TP: Our target prices for various buy levels are as follows

• The target prices for Buy Level #1 ($93.00) are $100 and $115 in the next 3 to 6 months.
• The target prices for Buy Level #2 ($100.00) are $115 and $130 in the next 3 to 6 months.

SL: To limit risk, place a stop loss at the following levels.

• The stop loss for Buy Level #1 ($93.00) is $88.80.
• The stop loss for Buy Level #2 ($100.00) is $92.00.

Note that the stop loss is on a closing basis.

Target Upside: Our target potential upside is 8% to 30% in the next 3-6 months.

• Entry at Buy Level #1 ($93.00): For a risk of $4.20, our first target reward is $7.00 and the second target reward is $22.00. This is a nearly 1:2 and 1:5 risk-reward trade.
• Entry at Buy Level #2 ($100.00): For a risk of $8.00, our first target reward is $15.00 and the second target reward is $30.00. This is a nearly 1:2 and 1:4 risk-reward trade.

In other words, this trade offers 2x to 5x more potential upside than downside.

Risks to Consider: The stock may reverse its overall trend if it breaks down from the various support levels with high volume. The sell-off of the stock could also be triggered in case of any negative news, overall weakness in the market, or any regulatory changes in the sector.

Recommended Bearish Trade (based on the chart)

In case the stock breaks down from the uptrend channel and closes below the support areas, it would point to an upcoming short-term correction. In that case, below are the entry level, stop loss level, and target prices.

Sell Level: You can take short positions on CHWY below the price of around $77.00. This sell level is marked as a red color dotted line in the chart.

Important Note: Make sure that you only enter the trade once the daily close is below the recommended price level.

TP: Our target prices are $70 and $65 in the next 3-6 months.

SL: To limit risk, place a stop loss at $81.00. Note that this stop loss is on a closing basis.

Our target potential downside is 9% to 16% in the next 3-6 months.

For a risk of $4.00, our first target reward is $7.00 and the second target reward is $12.00. This is a nearly 1:2 and 1:3 risk-reward trade

In other words, this trade offers nearly 2x to 3x rewards compared to the risks.

Risks to Consider: The stock may reverse its overall trend if it breaks upwards with high volume. The breakout of the stock could be triggered in case of any positive news, overall strength in the market, or any regulatory changes in its sector.

Happy Trading!

Trades of the Day Research Team

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