The best stock to buy right now: Amazon vs. Chewy

Amazon (AMZN -0.64%) And Tough (CHWY 0.24%) represent two different ways to invest in the e-commerce sector. Amazon is the world’s largest e-commerce company and Chewy operates a smaller online marketplace for pet products.

Chewy spun off from PetSmart and went public in 2019, but is up just 36% from its IPO price of $22 and is trading 75% below its all-time high. Amazon shares are up 118% in the last five years and are near their record high. Let’s see if the e-commerce leader will continue to outperform the niche underdog as a long-term investment.

The differences between Amazon and Chewy

Amazon is a larger and more diversified company than Chewy. Amazon initially only operated a first-party marketplace, but later launched a higher-margin third-party marketplace. Whole Foods Market was also acquired in 2017.

Amazon generates the majority of its revenue from its retail business, which operates in 22 countries and ships to more than 100 countries. It also binds more than 200 million members to its fixed Prime subscriptions, which offer free shipping options, exclusive discounts, streaming media services and other perks.

Amazon generates most of its profits from Amazon Web Services (AWS), the world’s largest cloud infrastructure platform, and its smaller advertising unit. These higher-margin stores subsidize the expansion of the lower-margin retail business.

Chewy operates a third-party marketplace that generates most of its revenue in the U.S., but its international expansion began last year with its entry into Canada. The company served just over 20 million active customers at the end of last quarter.

Chewy primarily sells pet food and pet products and engages customers with free Autoship subscriptions that offer discounts for recurring scheduled orders. Its Autoship orders generated 78% of its total revenue in the first half of 2024.

Chewy faces major competition from supermarkets such as B. opposite WalmartE-commerce giants like Amazon and even former parent company PetSmart. To widen its moat and boost its margins, Chewy has launched more private-label products, expanded its own pet health insurance plans and sold more digital ads on its marketplace.

Which company is growing faster?

From 2019 to 2023, Amazon’s net sales grew at a compound annual growth rate (CAGR) of 20%. From fiscal 2019 to fiscal 2023 (which ended in January), Chewy’s net sales grew at a slightly faster annual growth rate of 23%.

But Chewy’s growth slowed over the past three years as it failed to attract new active customers, and its net sales rose just 10% in fiscal 2023. Analysts expect net sales to grow at an even slower 6% annual growth rate from fiscal 2023 to fiscal 2026.

Chewy is trying to make up for the lack of new customer growth by increasing revenue per customer with its Autoship subscriptions, insurance plans, and ads — but the company clearly has no room left for growth. On the bright side, analysts expect earnings per share (EPS) to grow at a CAGR of 100% over these three years as the company reins in spending and buys back shares.

Amazon suffered a slowdown in 2022 as its retail business fell short of its pandemic-induced growth spurt and faced new inflationary headwinds for consumer spending. But the company reversed that slowdown with net sales growth of 12% in 2023 as those headwinds eased and the macroeconomic environment stabilized. From 2023 to 2026, analysts expect revenue to increase at a CAGR of 11%, while earnings per share increase at a CAGR of 36%.

This growth is expected to be driven by AWS expanding its market into new overseas markets and strong AI tailwinds for its cloud computing business. A warmer macro environment could also lead to more ad buys on its platforms.

The better buy: Amazon

Under generally accepted accounting principles (GAAP), Chewy and Amazon trade at 34 and 40 times this year’s earnings, respectively. Amazon’s stock may look more expensive than Chewy’s, but Amazon’s business is also much larger, growing faster, better diversified, and has a larger market moat. That’s why I believe Amazon will continue to outperform Chewy for the foreseeable future.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has positions at Amazon. The Motley Fool has positions in and recommends Amazon, Chewy and Walmart. The Motley Fool has a disclosure policy.