PetMed (PETS) Stock: Vetster Partnership A Growth Mega Booster

Earlier in the year, PetMed Express, Inc. (NASDAQ:PETS) announced its partnership with Vetster. We analyzed the potential impact of the partnership on PetMed by looking into how unique this partnership in the pet medication market is, and estimated how many additional customers it could provide. Furthermore, we determined how PetMed could leverage Vetster’s platform and how much of the percentage share of the pet medication market could Vetster capture.

Unique Partnership Providing an Additional of 0.3 mln Customers Yearly

Vetster is a pet telehealth platform that connects veterinarians with pet owners. With the partnership, PetMed, an online pet pharmacy would provide exclusive fulfillment to Vetster, whereas PetMed would then be able to offer telehealth service to its customers. The company mentioned in its previous earnings briefing that it believes that it is “enabling the first real mainstream pet telemedicine platform.” Therefore, we analyzed how PetMed could stand out from its competitors through this partnership and estimated how many additional customers could Vetster bring to PetMed.

Additionally, PetMed is Vester’s minority investor and had contributed “$5 million to the $30 Series B round” and may acquire more shares depending on whether PetMed can achieve the performance goals of driving business to Vetster. For PetMed’s competitors, as mentioned by Forbes…

and taking other initiatives to entice vets to fill prescriptions through Chewy, including a partnership with a pet insurance company.

Therefore, we believe this partnership provides a competitive advantage compared to its competitors in the pet care market.

The company also mentioned that PetMed chose Vetster as a partner because “users can see ratings and choose from a selection of vets” on Vetster. Based on Forbes, Vetster currently has 4,000 vets, whereas PetMed has 70,000 vets and more than 2 mln customers. Therefore, with the partnership,

PetMed will embed its e-commerce engine in Vester and Vetster add its telemedicine capabilities to PedMed’s website and app properties.

Hence, we believe this connects PetMed customers and vets and enables its customers to have access to pet telehealth services.

Households that Owns Pets (‘mln’)	90.5
Number of U.S. Vets (‘mln’)	0.12
Number of Customers per Vet	745.10
Number of Vets on Vetster	4,000
Estimated Number of Potential customers (‘mln’)	2.98
Estimated Additional Yearly Customers from Vetster (‘mln’)	0.30

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Source: Insurance Informative Institute, AVMA, Forbes, Khaveen Investments

We then calculate how much yearly customers could Vetster contribute to PetMed. We first obtain the number of customers per vet by dividing the number of households in the U.S. that own pets by the number of U.S. vets. We then calculated that each vet would have 745.10 customers. As mentioned, Vetster currently has 4,000 vets on its platform, therefore, with the assumption that each vet would contribute 745.10 customers, we forecasted that Vetster would contribute a total of 2.98 mln customers to PetMed. We then assumed PetMed requires 10 years to fully capture the customers. Hence, we estimated that Vetster could contribute an additional of 0.30 mln customers per year.

To conclude, we believe this partnership could bring an extra 0.30 mln customers yearly to PetMed, representing a growth rate of 15% compared to its 2022 number of customers of 2 mln.

PetMed Leverage on Vetster platform to Drive Additional Revenue

As mentioned by the company, Vetster is the fastest-growing pet care marketplace, and its main difference from other telehealth services is the flexibility that Vetster provides. Customers can select pet care services based on all of their needs. According to the company, PetMed’s customers will then be able to access virtual vet clinic services embedded with its pet medication and retail platform. Additionally, the “prescription medication can be prescribed directly to a pet’s owner in many cases without the need for an in-office visit.” We believe that the partnership could create new potential revenue streams for PetMed, enabling PetMed to attract more customers and create more incentives for its current subscribers.

Furthermore, PetMed’s customers who have a direct veterinarian relationship can then receive medication from PetMed’s catalog Rx which we believe could lead to an increase in virtual care for pets. Besides that, the partnership also enables the launch of Vet Live, a 24/7 video chat vet appointments service. We believe that the partnership could encourage PetMed’s customers to use Vet Live, then obtain prescriptions from PetMed while also attracting new customers by providing prescriptions to Vetster’s customers. Therefore, the partnership provides additional products and services to PetMed which we believe could increase the LTV of PetMed’s customers or attract new ones.

Vetster’s High Growth Drives PetMed’s Growth

The Pet Care industry – which is the total addressable market (“TAM”) – has a size of $150.67 bln, whereas Pet Telemedicine, which is the SAM (Serviceable Available Market), is worth $119.6 mln in 2021. To determine how much market share could Vetster capture in the Petcare market, we first obtained the average historical market share growth rate for Teladoc (TDOC) (21.57%). This is due to Vetster being similar to Teladoc by being the first mover in the pet telemedicine market. As mentioned by Vetster, it is “pioneering the global pet-care industry.”

Vetster Contribution	2021	2022F	2023F	2024F	2025F	2026F
Vester Revenue ($ mln)	7.5	10.72	15.33	21.92	31.34	44.80
Revenue Growth		42.97%	42.97%	42.97%	42.97%	42.97%
Total Market Revenue ($ mln)	119.6	140.65	165.40	194.52	228.75	269.01
Vetster Market Share	6.27%	7.62%	9.27%	11.27%	13.70%	16.65%
Market Share Growth		21.57%	21.57%	21.57%	21.57%	21.57%

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Source: Growjo, Grand View Research, Vetster, Khaveen Investments

We then estimated Vetster’s 2021 market share by dividing its revenue of $7.5 mln by the pet telemedicine market size of $119.6 mln and forecasted its growth based on Teladoc’s 21.57% historical yearly market share growth. We then forecasted the total market growth based on the veterinary telehealth market forecasted CAGR of 17.6% by Grand View Research. Lastly, we obtained Vetster’s forecasted revenue by the forecasted market share and forecasted market size. Based on our estimates, we calculated Vetster’s revenue to grow at a rate of 42.97% yearly. Therefore, we believe that as Vetster grows, it could capture an estimated market share of 16.65% in 2026, which would drive PetMed’s customer and revenue growth.

Risk: Lower Vetster Integration with PetMed

We believe one of the risks is that the additional customers and growth that Vetster would provide may be lower than our forecast, as some of PetMed’s current customers may already be using other Pet Telemed providers.

Verdict

Company	P/S
PetMed	1.64x
Chewy (CHWY)	1.66x
Wag! Group Co (PET)	0.57x
Petco (WOOF)	0.42x
Average	1.07x

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Source: Seeking Alpha, Khaveen Investments

Valuation	2022F	2023F	2024F	2025F
PetMed Revenue Forecast ($ mln)	332.03	403.24	489.72	594.74
Growth	21.45%	21.45%	21.45%	21.45%
Target Price ($)	22.48	25.07	27.67	30.27
Upside	13.06%	26.12%	39.18%	52.24%

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Source: Seeking Alpha, Khaveen Investments.

To conclude, we believe that Vetster could provide an additional 0.30 mln customers yearly to PetMed and increase the LTV of PetMed’s current customers with the additional services from this partnership. Besides that, we forecasted Vetster’s revenue to grow at an average of 42.97% and its high growth could bring more customers to PetMed. Overall, we derived our revenue forecast for PetMed at an average of 21.45% based on our estimate of an average customer growth of 15% from its Vetster partnership multiplied with our revenue growth forecast for Vester at 42.97%. Our total revenue forecast is higher than analyst consensus as we believe it has not accounted for the increased growth from the partnership.

To value the company, we first obtained the average P/S of PetMed, Chewy, Wag! Group Co and Petco which is 1.07x. Based on our revenue forecast at a growth rate of 21.45%, we obtained a price target in 2025 of $30.27. We prorated it to derive our 2022 price target of $22.48 which is an upside of 13.06% and rate PetMed Express, Inc. as a Buy.