Morgan Stanley delivers blunt message to America’s pet owners

Morgan Stanley has issued a strong warning to America's pet owners, highlighting the challenges they face in an increasingly tight economy. The investment firm has lowered its price target for Chewy Inc., a leading online pet retailer, from $37 to $36 while maintaining an "Overweight" rating. This follows Chewy's Q2 fiscal 2026 results, which showed a 7.3% year-over-year growth in net sales, though organic growth decelerated from 5.7% to 5.3%.

The company's stock has seen significant declines, dropping 11% in a single session and 36.22% year-to-date. Analysts have mixed opinions, with the average price target at $29, which is lower than the current share price. Morgan Stanley's note suggests that the recent sell-off was an overreaction to the earnings report, but it also acknowledges that the stock may not see a significant re-rating until there are positive organic estimate revisions.

Chewy has been making strides in expanding its pet healthcare and services offerings through the acquisitions of Modern Animal and SmartPak, which added $180 million in revenue. The company's healthcare business, which carries higher margins and more stable customer relationships, is growing. However, the market remains cautious, with Morgan Stanley estimating that Chewy will need to achieve 15-18% incremental margins in fiscal 2027 to justify a price re-rating.

While the firm expects Chewy's EBITDA margins to grow by approximately 16% through 2029, the stock currently trades at an 8.5x fiscal 2027 EBITDA multiple, which is seen as relatively low. Morgan Stanley believes that the redesigned Chewy+ membership program could be a catalyst for future growth, potentially driving top-line acceleration in fiscal 2027. However, a meaningful recovery for the stock appears to depend on organic growth estimates improving.