1 Growth Stock Down 4% to Buy Right Now

The stock market has dropped lately, with the S&P 500 index down 3.3% over the last month through March 25. Growth stocks, as measured by the S&P 500 Growth Index, fared worse, losing 4.5% during this time.

While investors have a host of reasons for selling, such as the uncertainty created by the tariff discussions, long-term investors shouldn't feel deterred. In fact, this could create a buying opportunity, provided the company's long-term fundamentals remain intact.

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Chewy's (NYSE: CHWY) share price has fallen more than 3.7% over the last month. However, the company's prospects remain bright.

Image source: Getty Images.

Growing industry

It's no secret that people love their pets, and often treat them like family members. Given their feelings, it's no surprise that they're willing to spend money on them.

You can see this by looking at how fast the the U.S. pet market has been growing. The sector saw sales increase about 5% in 2024 to $151 billion, according to Packaged Facts. It projects that the industry will grow 4% annually through 2028. A year ago, it noted that online sales have been growing even faster, and held a 37% share of the market in 2023, up from 2018's 20%.

Chewy, formed in 2011, has been in a prime position to take advantage of people's spending and the push to buy pet supplies online. Chewy has grown quickly with its focus on customer service, broad array of products, convenience, and fast delivery.

Reviving growth

After a sluggish period, its sales growth rate has picked up markedly. In its fiscal fourth quarter, which ended on Feb. 2, sales increased 14.9% to $3.2 billion. Chewy's top line gained 4.8% year over year in the third quarter.

The faster growth has been driven by higher and greater frequency spending. Chewy's active customers numbered 20.5 million, up over 2% from a year ago, and sales per active customer increased from $555 to $578. Sales to Autoship customers -- a particularly loyal group, since they sign up to regularly receive items -- increased over 21% to $2.6 billion.

These have proven to be profitable customers. Chewy's fourth-quarter gross margin expanded by 0.3 percentage points to 28.5%.

Opportunities for growth

Fortunately, Chewy's management isn't standing still. It's pursuing growth opportunities.

For starters, it increased advertising and marketing spending by more than 8% last year, and improved the site experience and app. That appears to be working, given the gain in customers.

Last year, Chewy launched in-person veterinary clinics. It's difficult to assess their progress given the newness, but this is a natural extension of Chewy's existing business.

Better valuation

The stock's price drop has created a better valuation. The shares recently traded at a price-to-earnings (P/E) ratio of 37, down from over 42 at the start of February. It's not cheaper than the overall market, as measured by the S&P 500 index, which has a P/E of 29.

But a stock's P/E multiple is only one part of the equation. While everyone likes to buy fast-growing companies at low valuations, that's not easy to do. With Chewy's prospects and accelerating growth, it makes sense to pay a little more.

Owning the stock has been rocky since the share price soared in the early days of the pandemic and subsequent sharp decline. But with the company on a better footing and growth opportunities in front of it, long-term shareholders will undoubtedly feel good about purchasing the shares at this price.

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Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chewy. The Motley Fool has a disclosure policy.