Chewy (CHWY) has multiple drivers that could support outperformance and the valuation is highly compelling, Morgan Stanley said in a note emailed Tuesday.

The brokerage said Chewy's Q4 results were "far better than feared" and the market is underestimating its potential to exceed initial guidance, particularly on earnings before interest, taxes, depreciation, and amortization, and the potential upside from vet clinics.

Morgan Stanley currently estimates 2026 gross margin expansion of 34 basis points, with contributions from rapid health and private label expansion, shift to premium products, better than expected onsite ads performance, and vet clinics.

The company can continue to extract efficiency gains in marketing, especially if Chewy+ adoption increases and/or offsite shows solid incrementality, according to the report.

The investment firm said it lifted its 2026 and 2027 revenue estimates by 1% each, driven by an expansion in net sales per active customer and low-single-digit active customer growth. Gross margin is also expected to increase by 1% in 2026, the firm said.

Morgan Stanley maintained an overweight rating on Chewy and lowered the price target to $49 from $50.

Price: 26.66, Change: +0.78, Percent Change: +2.99