The Kogan.com Ltd (ASX: KGN) share price has suffered a lot this year. It has dropped 57% in 2021. What now? I think there is a bull case and a bear case.
Kogan is one of the largest e-commerce businesses on the ASX. It operates the large Australian Kogan.com business, but it has also acquired the Mighty Ape business that predominately serves New Zealand (for now).
The bear case for the Kogan share price
Kogan shares have sank for several underlying reasons. But the key one is that its profitability is significantly down.
In the first four months of FY22, the ASX share had seen its adjusted EBITDA (EBITDA explained) fall to $12.4 million, down from $32 million in the first four months of FY21. That’s a decline of more than 60%.
The Kogan supply chain has seen the effects of product shortages and an escalation of costs. Kogan had been suffering from excess inventory after ordering too much. That meant extra warehouse costs, demurrage fees and subsequently higher advertising to offload that extra inventory.
EBITDA and net profit margins are now much lower than they were before. A lower net profit means a lower valuation.
Strong e-commerce growth may not return as the COVID-19 lockdowns seem to be over. Kogan does not have the strongest tailwinds any more.
Higher interest rates from central banks also seemingly mean that ‘growth’ shares like Kogan are not valued as highly as they used to be. But perhaps the lower price now means it’s a good opportunity?
The bull case for the Kogan share price
It seems that Kogan is going through a bit of a recovery. Kogan said that whilst adjusted EBITDA was much lower in the first four months of FY22, gross sales increased year on year to $432.7 million. Gross profit is also seemingly on course for a recovery as well, compared to the last quarter on FY21.
Kogan has fixed the biggest problems in relation to its inventory. It has right-sized its inventory levels, which has also brought the warehouse costs down too.
Whilst it has been investing in advertising, this has also led to a large increase in the number of Kogan First members – management are confident this will lead to long-term benefits for the company.
As the business returns to ‘normal’, I think that Kogan can get back to a normalised level of profitability, whatever that is in 2022 and onwards.
I think that the business model of e-commerce can lead to good network effects, with customers returning again and again for good value products. Kogan sells a wide array of products and services, which means it can upsell more services to more customers.
If e-commerce in the economy continues to grow, then Kogan can capture more market share in the next decade. It wants to hit $3 billion of gross sales by FY26.
It looks good value to me – the Kogan share price is priced at 25 times the estimated earnings for the 2023 financial year, according to forecasts on CommSec.
