Branding Chewy a meme stock is bad for the pet retailer, according to Wall Street analysts

Published Mon, Jul 1 202411:36 AM EDTUpdated Mon, Jul 1 202412:34 PM EDT

Chewy shares started swinging wildly after online personality Roaring Kitty revealed a big stake , but Wall Street analysts believe being branded as a meme stock is not good for the pet retailer. The meme stock leader, whose legal name is Keith Gill, has taken a 6.6% stake in Chewy, making him the third-largest shareholder. An initial boost in the share price — it surged 18% in two days early last week — has quickly faded, with shares falling more than 5% Monday. While Chewy is in a much better place fundamentally than GameStop or AMC , analysts said the elevated volatility and the potential meme status could hurt the retailer, whose stock surged during the pandemic and retreated afterward. "We view this morning's share price move and additional volatility as a potential exit opportunity for investors," said David Bellinger, a Mizuho analyst with a neutral rating on Chewy. "[A]n escalating, unpredictable, and difficult to track news flow may result in a narrower institutional investor base and growing hesitation to own shares and/or increasing likelihood to exit current positions," he wrote in a report. Selling from the biggest backer Meanwhile, Chewy's share price has also been affected by sales of stock from the private equity firm BC Partners, which is its largest shareholder. The firm recently sold 17.6 million of its shares back to Chewy for $500 million. BC Partners also dumped more than 5.3 million shares in the open market Thursday, the day Gill posted a picture of a cartoon dog that resembled Chewy's logo, sparking a huge rally. Many believe BC could use any rally in Chewy stock to sell more of its stake, putting a temporary ceiling on the shares. "We suppose some [Roaring Kitty] fans who plan to buy the stock today aren't aware that BC is a seller and stands ready to take advantage of another high-volume meme spike, if one materializes for more than an hour or two," Don Bilson, head of events-driven research at Gordon Haskett, said in a note. The dynamic could be at play Monday as Chewy's stock opened 9% higher, only to quickly give up all the gains and turn lower. "With BC still holding ~275m shares (~66% of total diluted shares outstanding), this presents a ceiling on upside with incremental retail interest in the name likely met by more selling pressure from BC," Seth Basham, Wedbush analyst, said in a note. Still, Wedbush rates Chewy outperform, saying the company continues to gain market share and materially expand profit margins in a retail segment that could be "turning the corner." — CNBC's Michael Bloom contributed reporting.