Is Chewy’s Margin Story Losing Steam, or Is a 48% Drop the Opportunity?

Chewy’s second-quarter results were met with downgrades and reduced price targets. However, beneath the surface lies a more nuanced story about growth, valuation, and the pet-e-commerce market.

The Recurring Revenue Myth

Chewy’s Autoship subscriptions are often touted as a unique advantage over competitors. But how significant is this recurring revenue stream really? With 21.7 million active customers, up only 3.8% from last year, it’s clear that Chewy’s growth is slowing down. Organic revenue growth of 5.7%, excluding mergers and acquisitions, suggests a structural issue rather than a cyclical one.

The problem lies in the fact that Chewy’s margin story has been partly manufactured by non-recurring items such as tariff refunds and rebate timing. When these temporary boosts are stripped away, the company’s adjusted EBITDA margin of 6.8% looks far less impressive. This raises questions about whether Chewy’s growth can sustain its premium multiple.

Deceleration Meets Reality

Evercore ISI’s downgrade is a telling sign that even the most ardent bulls are starting to lose faith in Chewy’s story. With mid-single-digit growth and a 35x price-to-earnings ratio, there’s little room for error if the company’s deceleration proves structural rather than cyclical. Amazon and Walmart’s growing presence in the pet-e-commerce market adds pressure on Chewy’s pricing power and margins.

Chewy’s consistent share gains from Amazon are a double-edged sword. While it’s true that the company has been capturing market share, this also means there’s a ceiling to its growth potential. The bull case for Chewy relies heavily on the assumption that its leadership in the pet-e-commerce market will continue unabated. But what if this trend reverses?

The Market’s Reaction

The recent stock drop may be seen as an opportunity by some, but it’s essential to separate fact from fiction. With 44 hedge funds holding CHWY in the second quarter of 2026, down sharply from 53 in the first quarter, institutional investors are losing confidence in the company’s growth prospects.

The question is whether Chewy’s deceleration will prove cyclical or structural. Without a clear growth catalyst, it’s unlikely that the stock will rebound anytime soon. The recent drop may be a bargain only if the current deceleration is indeed temporary.

Waiting for the Next Quarter

As Evercore ISI suggests, waiting for the upcoming quarterly reports to see if there’s any real organic reacceleration toward high-single digits and margin expansion might be the wisest course of action. If Chewy can deliver on its promises, a beaten-down price may become an opportunity. But if not, the stock is cheap for a reason.

Investors would do well to remember the old adage: “pigs get fat, hogs get slaughtered.” While Chewy’s margin story may have been a false narrative all along, it’s essential to separate fact from fiction and wait for the next quarter’s results before making any conclusions.