What You Need to Know About Chewy's IPO

The Dania Beach, Florida, company is setting out to raise $100 million, but that figure listed in documents filed Monday, April 29, 2019, is likely to change in the weeks ahead as Chewy's bankers gauge investor demand for the IPO.

Chewy bulls will argue that the company’s significant losses don’t matter because the money it spends to acquire new customers will pay off over the long-run through recurring revenue streams.

In order to justify the midpoint of its IPO range, $20/share, CHWY must grow revenue by 15% compounded annually for 9 years and achieve NOPAT margins of 6%, the same as PetSmart’s historical average.

It seems unrealistic that Chewy could ever achieve 70% market share and such high margins when it has to compete with Amazon (AMZN), which sold over $1 billion of pet food last year .

If one assumes that CHWY grows revenue by 10% compounded annually for 10 years and has slightly lower NOPAT margins of 5%, the stock is worth just $9/share today, a 55% downside from the midpoint of the IPO range.

Disclosure: David Trainer, Kyle Guske II, and Sam McBride receive no compensation to write about any specific stock, style, or theme.

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