Chewy stock rises on ad migration progress

Investing.com -- Shares of Chewy (NYSE:CHWY ) climbed 3.3% as Mizuho (NYSE:MFG ) analysts highlighted the pet retailer's successful transition to an in-house advertising platform. The internal migration aligns with the company's strategic move to use its own first-party software and technology stack, which is reportedly ahead of the initial end of FY24E target.

The transition allows Chewy to reduce costs in a high-margin area, with gross margins on sponsored ads estimated at 60-70%. Additionally, the shift to a first-party system enables Chewy to offer vendors a more dynamic self-service model with improved real-time analytics, potentially unlocking additional demand. The integration of sponsored products into the Chewy app also opens new channels and ad supply opportunities.

Mizuho's analysis suggests that Chewy's retail media, which currently constitutes approximately 1% of its revenue, has the potential to grow to about 3% in the coming years. This growth trajectory is seen as a crucial element of the company's overall strategy. The optimism is further supported by the launch of a new advertising site this month, which underscores the significance of the advertising platform as a "critical revenue stream" for Chewy.

The company's advertising arm has demonstrated effectiveness, with brands reportedly seeing over $7 in lifetime value for each $1 invested in Chewy's advertising. Additionally, about one-third of ad clicks lead to a sale, and roughly 45% of purchases attributed to Chewy ads result in some type of recurring order.

Mizuho analyst David Bellinger commented, "Overall, we see plenty of runway ahead for retail media to scale from ~1% of revenues to ~3% over the next several years, reinforcing one key component of our positive thesis." The analyst's statement underlines the potential for Chewy's retail media revenue, which has primarily been driven by sponsored products, to expand into other areas including sponsored brand pages, video content, and external search and social channels.

The analyst reiterated an Outperform rating and $42 price target on Chewy.

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Source: Investing.com