Chewy, Inc. (CHWY) reported strong EBITDA and free cash flow on June 11, but CHWY stock is down. Is it time to buy? The answer is yes, since value investors can use the company's guidance to predict higher FCF. Using a FCF yield metric, its target value is worth over 20% more at $50.89 per share.
CHWY is at $42.10 in midday trading on Tuesday, June 17. This article will show why CHWY stock is worth so much more.
Strong EBITDA and FCF Margins
Chewy, the pet food, supplies, and health and services company, produced positive free cash flow (FCF) for its fiscal Q1 ending May 3. Moreover, based on Chewy's guidance, we can project strong FCF going forward.
The fundamental reason is that people love their pets and will continue to spend heavily on them. Chewy reported that its net sales per active customer (NSPAC) rose 3.7% to $583, and total sales were up +8.3% year-over-year (Y/Y) to $3.1 billion.
As a result, its cash flow remained strong. For example, gross margins were 29.6% compared to 29.7% last year. Moreover, its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization), a form of cash flow that doesn't include working capital flows and capex spending, was 6.2% of sales. That compares to 5.7% in last year's Q1.
Moreover, its adj. EBITDA margin was 5.0% over the last 12 months (LTM), up from 3.0%. Management also guided for 10% higher EBITDA margins of between 5.4% and 5.7% on page 10 of the earnings deck.
The same thing happened with free cash flow (FCF), a more powerful cash flow measure that deducts capex and net cash flows from EBITDA cash flows. FCF was $49 million in Q1, compared to $53 million a year ago.
The LTM figure for FCF is more important since measuring a full year of FCF is more important going forward. The chart from page 9 of its earnings deck shows that its LTM FCF was $449 million. That represented 3.71% of the $12.7 billion in TTM sales (i.e., $449m/$12,100m = 0.0371).
As a result, assuming that FCF margins will also rise at least 10% as EBITDA margins are forecasted by management, we can expect at least a 4.1% FCF margin this year and next.
For example, analysts now project sales will rise to $12.48 billion this FY ending Jan. 31, 2026, and to $13.38 billion the following year. So, the run rate NTM revenue will average $12.93 billion.
That implies that its next 12 months (NTM) FCF will be around $527 million:
$12.93b x 0.041 FCF margin = $527 million NTM FCF
That would be +16.6% higher than the $452 million in FCF it made in FY 2024 (see the chart above). In other words, CHWY stock is likely to be worth much more. But, how much?
Target Prices for CHWY Stock
One way to value a stock is to assume that 100% of its free cash flow is paid out as a dividend. The resulting dividend yield (the same as a FCF yield) can be used to value the stock.
For example, let's assume that all of the company's projected $527 million next 12 months (NTM) FCF is later paid out as a dividend. What would its market cap be?
Here is how we can project that. Let's assume that the market gives the stock a 2.5% dividend yield. (After all, its LTM $449 million FCF represents 2.57% of the stock's present $17.44 billion market cap today, according to Yahoo! Finance).
Here is the math formula:
$527m FCF / 0.025 = $21,080m = $21.08 billion market cap
That is +20.9% higher than today's market cap:
$21.08b / $17.44b today = 1.2087 = +20.9% upside potential
In other words, CHWY stock is potentially worth over $50 per share, i.e., +20.9% more than today's price:
$42.10 x 1.2087 = $50.89
Analysts Agree. Sell-side analysts see CHWY as undervalued, although some not as much as my price target.
For example, Yahoo! Finance reports that the average of 30 analysts is $44.99 per share. However, Barchart shows that its mean survey is $45.22, slightly higher.
However, AnaChart.com, which tracks analysts who have written recently on the company, shows that 23 analysts have an average price target of $50.74. That is very close to my price target of $50.89.
The bottom line is that analysts believe there is good upside in CHWY stock.
One way to play this is to set a lower buy-in price by shorting out-of-the-money (OTM) put options (and get paid doing this).
Shorting OTM Puts
For example, look at the July 18, 2025, expiration period - 31 days to expiry (DTE). It shows that the first 2 out-of-the-money (OTM) put tranches have good yields.
The table below from Barchart shows that the $40.00 strike price, 5% below the trading price, for July 18, has a midpoint premium of $0.97. And the $37.50 strike has a $0.41 premium.
That means a short seller can earn an immediate yield of 2.425% with an order to “Sell to Open” the $40.00 strike price put (i.e., $0.97/$40.00 = 0.02425). The $37.50 short put play earns a 1.1% yield (i.e., $0.41/$37.50 = 0.0196).
In other words, an investor who secures $4,000 can make an immediate income of $97 shorting 1 put contract. And by doing an even mix of the two strikes, an investor can make 1.78%:
$97+$41 = $138
$138 / ($4,000 +$3,750) = $138/$7,750 = 0.0178
That is a very good result for a one-month expected return (ER). Moreover, the investor's breakeven point is much lower. For example, the $40 strike price put has a breakeven of $39.03 ($40-$0.97), and the $37.50 strike has a $37.09 breakeven.
That means the average breakeven is $38.06 for an even mix, or over 9.5% lower than today's price.
The bottom line is that by shorting these puts, an investor can make almost 1.8% for an obligation to buy the stock at a 9.5% lower net price.
That's a good way to play CHWY stock, especially since its price target is over 20% higher than today.
