The Kogan.com Ltd (ASX: KGN) share price has dropped a lot this year. Is it now too cheap to ignore?
Since 20 October 2021, Kogan shares have fallen almost 20%. Over the 2021 calendar year to today, the Kogan share price has plunged just over 50%.
There are good reasons for that decline in the valuation. Profitability has fallen significantly since the first half of FY21.
Kogan was hurt by lower-than-expected demand, higher inventory expenses and the subsequent cost of lowering its inventory to the right level with marketing and discounting costs.
However, things may be starting to turn around.
Kogan’s FY22 first quarter update
The e-commerce business recently revealed how it performed in the first three months of FY22. Compared to the last three months of FY21, gross sales grew by 23.2% to $330.5 million, gross profit increased 31.6% to $52.5 million and Kogan First members rose by 64.4% to 197,000.
Year on year, active customers increased by 30.7% to 3.351 million, whilst Mighty Ape ended with 748,000 active customers.
Whilst it only made $10.8 million of adjusted EBITDA (EBITDA explained), Kogan said it had resolved its previous inventory pressures and closed a number of inefficient overflow warehouses.
Kogan said that the reduction in inventory levels has helped the company significantly reduce its warehousing costs, delivering an average variable cost saving of around $0.8 million per month in the first quarter of FY22 compared to the last quarter of FY21.
Is it too cheap to ignore?
The Kogan share price has certainly gone through a big decline, and it’s making less profit.
But profit is expected to recover in FY22 and grow in FY23. At least, that’s what the CommSec numbers say. Not many investors were expecting the huge e-commerce boom in 2020 and I’m not sure many investors would have called the scale of the profit hit in the second half of FY21 either.
I think that Kogan (and Mighty Ape) have all the right building blocks for a successful future. Gross sales, active customers and Kogan First members continue to grow at a good double digit rate. The wide-ranging business model allows for growth in gross sales per customer and higher profit margins. Scale benefits should happen as it keeps growing.
Using CommSec’s estimate, the Kogan share price is valued at 22 times the estimated earnings for the 2023 financial year. That seems like a pretty good price for a business growing its top line at a solid double rate rate.
It’s one of the ASX growth shares that I have on my watchlist.
