Pet portal Chewy, Inc. (CHWY) is trading lower by more than 1% in Friday's pre-market after posting a second quarter loss of $0.08 per share, $0.08 better than analyst estimates, on an impressive 47% revenue increase to a slightly better-than-expected $1.7 billion. The company also raised third quarter and fiscal year guidance, and it is looking for earnings before interest, taxes, depreciation, and amortization (EBITDA) to rise to break-even levels.

Key Takeaways

  • Chewy beat top- and bottom-line estimates but reported a quarterly loss.
  • The specialty retailer hasn't posted a profit since coming public in 2019.
  • The stock fell 19 points last week, highlighting growing shareholder anxiety.
  • Short-term downside risk appears limited to the mid-$50s.

The specialty retailer hasn't posted a quarterly profit since coming public in June 2019, but that hasn't stopped investors and speculators from bidding up the stock, which has doubled in price since the last trading day of 2019. However, this morning's sell-the-news reaction could signal shareholder impatience with the company's bottom line during a pandemic that has super-charged income at most e-commerce sites.

Wall Street consensus rates Chewy as a "Moderate Buy" based upon eight "Buy" and four "Hold" recommendations. No analysts are recommending that shareholders sell positions at this time, despite exceptional year-to-date returns. Price targets currently range from a low of $49 to a Street-high $75, while the stock is set to open Friday's session about $4 below the median $63 target. That positioning could be attractive to some investors who sat on their hands during last week's 19-point selloff.

Amortization is an accounting technique used to periodically lower the book value of a loan or intangible asset over a set period of time. In relation to a loan, amortization focuses on spreading out loan payments over time.

Chewy Daily Chart (2019 – 2020)

Chart showing the share price performance of Chewy, Inc. (CHWY)
TradingView.com

The company came public at $36.00 on June 14, 2019, and entered an immediate downtrend that continued into October, when it found support at $22.28. A successful November test at that level stoked buying interest into January 2020, when it topped out in the low $30s. A failed February breakout attempt brought sellers off the sidelines once again, adding to a pandemic downdraft that posted an all-time low at $20.62 in March.

The subsequent recovery wave completed a 100% retracement into the prior high one week later, setting off an immediate breakout, driven by windfall revenue at top e-commerce sites. The uptrend eased into a combination rising channel and rising wedge in April, filling out the pattern with a parabolic two-day buying wave at the start of September, followed by a steep retracement that has reestablished resistance in the mid-$60s.

Chewy Short-Term Outlook

The stock could have trouble shaking off selling pressure on Friday because downside momentum was firmly established ahead of the earnings report, making lower prices the path of least resistance. Bulls will need to mount the cluster of selling pressure up to $65 to improve the short-term technical tone, while bears are unlikely to press their bets at or near the narrowly aligned 50-day exponential moving average (EMA) and channel support line between $52 and $55.

The on-balance volume (OBV) accumulation-distribution indicator lagged price in the second quarter but completed a breakout in July and added a higher high in September. Distribution in the past week hasn't undercut the prior peak, but that could change on Friday if bulls don't come to the rescue. The red line should be watched if selling pressure picks up, looking for OBV to reach that level at the same time as channel support, offering a potential buying opportunity.

A wedge is a price pattern marked by converging trendlines on a price chart. The two trendlines are drawn to connect the respective highs and lows of a price series over the course of 10 to 50 periods. The lines show that the highs and the lows are either rising or falling at differing rates, giving the appearance of a wedge as the lines approach a convergence.

The Bottom Line

Chewy stock sold off ahead of earnings and is trading lower after better-than-expected second quarter numbers, but short-term downside risk appears limited, with support just three to five points below the current price.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.