Morgan Stanley analysts upgraded shares of Chewy (NYSE:CHWY) to Overweight from Equal Weight, lowering the price target to $28 from $31 per share in a note Tuesday.
The analysts told clients that with the stock declining more than 50% since mid-July on TAM saturation concerns, they believe the move is overdone as "discrete macro headwinds have played an underappreciated role."
Chewy shares are up over 4% premarket at $19.40 per share, adding to Monday's over 3% rise.
"According to our analysis, CHWY is still gaining market share on both a revenue and customer basis. Although the pet macro remains weak, we see an attractive combination of better-than-expected revenue growth and ongoing margin expansion paired with a reasonable valuation," the analysts explained.
"Our analysis suggests the pet industry macro has posed a greater headwind to CHWY's top-line growth than the market appreciates, but may be bottoming," they added. "We believe the pet macro may be bottoming as pet household penetration has already returned to pre-COVID levels despite positive demographic trends as Gen-Z and Millennials have higher rates of pet ownership."
The analysts also noted that pet food price inflation is cooling quickly, which should limit a further shift from premium to value, and CHWY's hardgoods segment has returned to growth in 2Q. The firm believes the worst macro may be in the rearview mirror, "potentially leading CHWY to reaccelerate customer gains in FY24."