Market Commentary: 1 Pet Stock You Would Be Barking Mad To Overlook

Following a market correction in 2022 of about 20%, this year has been topsy turvy with some stocks doubling and others lagging like an anchor is tied to their share price.

PetMed Express falls into that latter category as losses mounted but the underwhelming performance has created a potential opening for value investors to get in at really low prices.

Key Points

• Despite increased revenue, PetMed Express missed Wall Street forecasts and reported a quarterly loss with rising operating expenses, negatively impacting its share price.
• PetMed’s challenges include suspended dividends, reduced cash reserves, and increased competition, but a DCF analysis suggests a potential 35% upside in 2024.
• Insider buying and a growing pet care market provide some optimism, yet financial uncertainties may deter new investors and call for careful monitoring of the company’s financial health.

Is The Tail Wagging the Dog?

At first glance, it’s not obvious why PetMed Express share price has been sliding. After all, in the past quarter alone revenues were up by almost double-digits in percentage terms. For those investors who have been around the block a few times, though, the key comparison is not only year-over-year growth but also whether numbers beat Wall Street forecasts. And in the case of PetMed, they did not, leading to a crushing blow to the share price.

As disappointed as analysts were, shareholders were more so when the company reported a loss for the quarter. Worse still, operating expenses soared, creating anxiety among investors that higher costs are needed to sustain growth.

Zooming out slightly, another concerning trend appears. The top line hit an inflection point at the turn of the decade and hasn’t turned back up in any meaningful way since. Nonetheless, an inkling of hope on the horizon is the forecast for profitability next year.

Will PetMed Pop In 2024?

One key metric that stands out for investors is the company’s P/S ratio that is well under 1, sitting currently at around 0.6x to be precise. That means PetMed’s market capitalization is actually under its annual sales. What could lead to such a surprising result? The answer lies in earnings with the company trading at over 700x future earnings, an exorbitantly high ratio if ever there was one.

And clearly some uphill sledding lies ahead because PetMed Express is facing significant challenges. For example, the Board of Directors has suspended quarterly dividends to focus on growth, raising concerns about its long-term profitability.

In addition, cash reserves have significantly decreased to just over $50 million in Q2, indicating potential future financial constraints. Additionally, increased competition from Chewy, now the largest online pet pharmacy, has diminished PetMed’s competitive advantage in the market.

With all that said, a DCF forecast puts the upside for PetMed at around 35% to fair value of $9.75 per share, and if realized that could make 2024 a banner year.

Time to Buy or Sell?

Despite challenges, PetMed Express shows some positive signs. Two top executives recently bought shares post-Q2 earnings, hinting at their conviction in the stock’s undervalued status.

Additionally, the pet care market is expected to double in the next decade and offers growth opportunities for PetMed Express. As such, existing shareholders might consider retaining their shares, anticipating a potential rise if the company’s financials improve but the caveat is this scenario, may not be compelling enough for new investors to add PetMed Express to their portfolios.

For value investors, the upside from a cash flows analysis is intriguing but a close eye needs to be kept on the balance sheet to ensure no further mis-steps or another share price slide could be on the cards.