Chewy, Inc. (CHWY) is down more than 1% in pre-market trade on Friday after reporting a second-quarter loss of $0.08 per share, $0.08 better than analyst projections, on a 47% sales growth to a slightly better-than-expected $1.7 billion. The business also increased its third-quarter and fiscal-year projections, and it expects earnings before interest, taxes, depreciation, and amortization (EBITDA) to reach break-even levels.
- Chewy outperformed on both the top and bottom lines, but recorded a quarterly loss.
- Since going public in 2019, the niche retailer has not turned a profit.
- Last week, the stock dropped 19 points, showing mounting shareholder fear.
- The downside risk looks to be restricted to the mid-$50s in the short term.
The specialty retailer has yet to report a quarterly profit since going public in June 2019, but that hasn’t prevented investors and speculators from buying up the stock, which has more than quadrupled in price since the end of 2019. However, this morning’s sell-the-news response might indicate shareholder dissatisfaction with the company’s bottom line in the midst of a pandemic that has boosted revenue at numerous e-commerce sites.
Chewy is rated a “Moderate Buy” by Wall Street, with eight “Buy” and four “Hold” recommendations. Despite excellent year-to-date results, no experts advise shareholders to sell investments at this time. Price estimates presently vary from $49 to $75 on the Street, with the stock expected to start approximately $4 below the consensus $63 price on Friday. This posture may be appealing to some investors who waited on the sidelines during last week’s 19-point drop.
Amortization is an accounting method that is used to reduce the book value of an intangible asset over a predetermined period of time. In the context of a loan, amortization is concerned with spreading out loan payments over time.
Chewy Daily Chart (2019 – 2020)
On June 14, 2019, the firm went public for $36.00, and it immediately fell into a decline that lasted until October, when it found support around $22.28. A successful test at that level in November fueled purchasing enthusiasm until January 2020, when it peaked in the low $30s. A failed February breakout attempt drew sellers back in, adding to a global downdraft that reached an all-time low of $20.62 in March.
One week later, the following recovery wave completed a 100% retracement into the former high, triggering an instant breakout powered by windfall income at leading e-commerce sites. In April, the uptrend shifted into a rising channel and rising wedge pattern, which was completed by a parabolic two-day purchasing wave at the beginning of September, followed by a severe pullback that reestablished resistance in the mid-$60s.
Chewy Short-Term Outlook
The stock may struggle to shake off selling pressure on Friday since negative momentum was strong ahead of the earnings announcement, making lower prices the route of least resistance. Bulls will need to create a cluster of selling pressure up to $65 to enhance the short-term technical tone, while bears are reluctant to place their wagers at or around the closely linked 50-day exponential moving average (EMA) and channel support line of $52 to $55.
The accumulation-distribution indicator on-balance volume (OBV) trailed price in the second quarter, but completed a breakout in July and added a higher high in September. Distribution hasn’t undercut the preceding top in the last week, but that might change on Friday if bulls don’t come to the rescue. If selling pressure increases, look for OBV to hit that level at the same time as channel support, indicating a possible buying opportunity.
On a price chart, a wedge is defined by converging trendlines. The two trendlines are constructed to link the highs and lows of a price series over a period of 10 to 50. The lines demonstrate that the highs and lows are increasing or decreasing at different rates, forming a wedge as the lines approach convergence.
The Bottom Line
Chewy stock dropped before of earnings and is now trading lower after better-than-expected second-quarter results, but short-term downside risk is minimal, with support at three to five points below the current price.
Disclosure: At the time of publishing, the author had no investments in the aforementioned securities.
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