On Wednesday, Chewy Inc . (NYSE:CHWY) received an upgrade in its stock rating from Hold to Buy by a CFRA analyst, who also increased the price target for the company's shares to $39.00, up from $31.00. Currently trading at $33.03, InvestingPro analysis suggests the stock is slightly undervalued. The new valuation is based on a blend of 19 times the fiscal year 2026 EBITDA and 1.6 times the fiscal year 2026 EV/sales, reflecting the company's strong market position with its $13.7 billion market capitalization.
The analyst noted a reduction in the fiscal year 2025 EPS estimate to $0.99 from the previous $1.06, while the fiscal year 2026 EPS forecast was raised to $1.29 from $1.25. Chewy's third fiscal quarter adjusted EBITDA reached $138 million, a 67% increase year-over-year, surpassing expectations by $18 million and achieving a 4.8% margin, which is an improvement of 180 basis points from the previous year.
The company maintains strong fundamentals with a 29% gross profit margin and impressive revenue of $11.3 billion in the last twelve months. Additionally, the company saw a 0.8% quarter-over-quarter increase in active customers, marking the second consecutive quarter of sequential growth.
The analyst expressed confidence that Chewy will experience year-over-year net active customer growth in the next quarter and anticipates this trend to continue into fiscal year 2026, supported by a positive trajectory in pet household formation.
The upgrade reflects not only the improving trends in net active customer numbers but also a recent uptick in hardgoods sales and the expectation of continued strong margin expansion in fiscal year 2026.
Several factors are expected to drive margin improvements, including increased penetration of private label products, growth in sponsored ads, a favorable mix shift towards items like healthcare, and the implementation of automated fulfillment centers.
The analyst projects that Chewy will generate free cash flow of $417 million in fiscal year 2025 and $627 million in fiscal year 2026, an increase from $343 million in fiscal year 2024.
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