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It is not uncommon in the U.S. stock market for a company’s share price to diverge from its fundamentals. So far this year, shares of pet e-commerce company Chewy (CHWY) have fallen more than 40%, even dropping below their 2019 IPO price. Yet over the same period, the company’s free cash flow grew 24% to $562 million. This contrast has left many investors puzzled: What exactly is wrong with Chewy?
A subscription model underpins the fundamentals
Chewy’s core advantage lies in its Autoship subscription service. This recurring delivery program for pet food, treats, and medications has become the company’s business pillar. In fiscal 2025, Autoship sales accounted for 83% of total revenue, up from just 76% two years ago. Spending from subscription customers grew 12%, outpacing the company’s overall revenue growth of 6%. This model provides Chewy with a predictable stream of recurring revenue and is the biggest highlight of its fundamentals.
Why isn’t the market buying it?
Despite the decent numbers, market concerns are equally clear. First, Chewy operates in a low-margin, mature industry where consumers are highly price-sensitive. Rivals like Amazon and Walmart are steadily gaining share. If a price war breaks out, Chewy’s margins would be the first to suffer.
Second, the rise of AI-powered shopping agents poses a new threat. If AI bots bypass Chewy’s online storefront to directly compare prices, the company’s highly profitable advertising revenue could be hit. Management argues that more than 85% of sales come from manufacturer-priced products and that Autoship has structural protections, but this remains an unresolved risk.
From selling dog food to opening clinics
Chewy is trying to prove it is more than just a low-margin pet supplies retailer. The company is aggressively expanding into offline pet medical services. Last month, it acquired Modern Animal, adding 29 physical clinic locations and bringing its total to 47. The acquisition is expected to be accretive to earnings per share within a year.
Alongside this business mix optimization, the company’s profitability is improving. Adjusted EBITDA margin has risen from 3.3% in fiscal 2023 to 5.7% in fiscal 2025. Management expects another 100 basis points of expansion this year, with a long-term target of at least 10%. Additionally, the company has approximately $880 million in net cash and no debt, providing ample financial flexibility.
Valuation and takeaways
At its current share price, Chewy trades at a forward price-to-earnings ratio of about 12 times this year’s earnings estimates. For a company with high recurring subscription revenue, a strategic expansion into pet healthcare, and consistently growing free cash flow, this valuation does not appear expensive. While market pessimism has its reasons, whether Chewy can break through the challenges of price competition and AI disruption ultimately depends on the success of its physical clinic strategy. For long-term investors, this “beaten-down” pet stock may be worth a second look.
