The Kogan.com Ltd (ASX: KGN) share price could be one to perform over the long term from today’s price of just over $14.
Why could Kogan.com do so well?
There are a few investors out there that aren’t the biggest fans of Kogan.com or the management. But the most important thing is (sustainable) returns from the business.
The growth it’s generating is undeniable. In the FY21 half year result, it generated net profit after tax (NPAT) growth of 164.2%. There aren’t many businesses on the ASX with market caps above $1 billion that are growing that fast.
Looking at the underlying numbers, gross profit went up by 126.2% to $112.9 million. Adjusted EBITDA (EBITDA explained) grew by 184.4% to $51.7 million and adjusted NPAT grew 250.2% to $36.5 million. Adjusted profit / earnings per share (EPS) grew by 211.7% to $0.35.
The company keeps growing every year and the acquisition of Mighty Ape expands its growth potential further.
There are quite a few reasons why I think Kogan.com could keep performing well from the current Kogan.com share price of $14.26:
E-commerce trend
COVID-19 has turned a large number of people into online shopping converts. I know my own household has done more of our shopping online as well over the last 12 months.
I don’t think this trend is going to reverse much, if at all. The world was slowly, but steadily, moving online and I think COVID-19 has just accelerated this trend.
Aussies apparently don’t/didn’t shop as much as people in other western countries, so there’s a lot of potential for Kogan.com to capture more market share. It helps that Kogan’s offering is getting steadily bigger with its divisions like ‘exclusive brands’ and Kogan Marketplace.
Operating leverage
One of the biggest reasons why I think Kogan.com can generate good returns is that it seems very scalable, with profit margins steadily rising. The higher the profit margin, the more that $1 of new revenue adds to the bottom line profit. I think net profit is the most important statistic in the profit & loss statement, as that’s what a lot of investors judge the share price against.
In the first half of FY18, Kogan.com had an EBITDA margin of 6.7% and a gross profit margin of 19.4%. In the first half of FY21, it had an EBITDA margin of 9.4% and a gross profit margin of 27.3%.
As an e-commerce business, it’s very cheap to add new products and customers. Platform effects are powerful. Kogan Marketplace growth is particularly useful because it doesn’t come with the same inventory requirements as other parts of the business.
Solid dividends
Paying growing dividends is a nice way to reward shareholders and boost the total shareholder return.
The company’s board declared a fully franked interim dividend of 16 cents per share, up 113.3% compared to last year.
It now has a fully franked dividend yield of 2%, which isn’t bad at all for a high growth tech share.
Summary thoughts
Kogan.com has a lot of features that you’d want from a growth share: big potential market, growing market share, fast profit growth, rising margins, increasing dividends and a healthy balance sheet. I think it looks reasonably priced, according to CommSec, at 27 times the estimated earnings for the 2021 financial year.
