Chewy shares plummet on disappointing Q2 results: should you buy or sell?

On Thursday, Chewy Inc. (NYSE:CHWY) shares plummeted nearly 9% after announcing its most recent quarterly results. The company reported its fiscal Q2 revenue and earnings Wednesday after markets closed, missing expectations.

Chewy posted a GAAP EPS of -$0.04 compared to the consensus Street estimate of -$0.01. On the other hand, its non-GAAP earnings per share of $0.02 outperformed the expectations by $0.03, while revenue of $2.16 billion missed by $10 million despite growing by more than 27% on a year-over-year basis.

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Chewy also reported an adjusted EBITDA margin of just 1.1% or $23.3 million, well below its guidance of 27% or $34.8 million.

Should you bet on Chewy’s growth despite its steep valuation?

From a valuation perspective, Chewy shares trade at a steep forward P/E ratio of 228.87. Moreover, its price-book value of 514.29 indicates substantial overvaluation. 

However, with analysts expecting Chewy’s EPS to grow by 64.20% this year before spiking by more than 213% next year, growth investors could opt to capitalize on the opportunity.

Therefore, with shares down more than 10% this year, Thursday’s massive pullback could be an opportunity to capitalize on Chewy’s growth prospects. However, investors could be cautious after the company missed Q2 estimates.

The CHWY stock pullback could continue

Technically, Chewy shares seem to have plunged to trade below the 100-day moving average. However, the stock is yet to hit oversold conditions of the 14-day RSI, leaving room for more downward movement.

As a result, investors can still target extended declines at approximately $75.78 or lower at $69.57. On the other hand, 485.94 and $92.71 are critical resistance levels.

Bottom line: there is still time to sell Chewy

In summary, although Chey’s growth story looks exciting, the short-term decline seems poised to continue. Moreover, the CHWY stock is yet to hit oversold conditions despite Thursday’s plunge.

Therefore, with current analyst estimates looking unrealistic after the company failed to match the Q2 forecast, investors could choose to stay away and monitor the performances for the next few quarters. As a result, the stock price could continue to fall in the short term.

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