In my opinion, the Kogan.com Ltd (ASX: KGN) share price looks like a compelling ASX growth share right now.
Kogan is one of the largest online retailers. It sells numerous products including air cons, TVs, shoes, clothes, phones, computers, various home appliances, tools, sports and so on. It also offers various services like mobile, home internet, various insurances, superannuation and more.
I understand why the market has gone negative on Kogan. But I think that the business has been oversold and represents good long-term value with both short-term and long-term catalysts for the business.
Short term catalysts
It is definitely true that Kogan has gone downhill over the last 12 months. The company misjudged how much demand there was going to be, resulting in over-ordering stock and having way too much inventory. This cost the business in warehousing costs and it had to pay for extra marketing to reduce its inventory level back to normal.
However, the reduction in inventory levels has led to the company significantly reducing its warehousing costs, delivering an average variable saving of $0.8 million per month in the first quarter of FY22 compared to the fourth quarter of FY21.
I think the negative impacts of 2021 can quickly improve, making the FY22 picture much better.
Another factor could be the ongoing rapid spread of the Omicron variant, which may lead to Aussies living in a partial ‘lockdown’ even if there isn’t an official one. This could lead to another boom for e-commerce demand, which Kogan could be able to capitalise on.
So, whilst I’m thinking about the Kogan share price for the long-term, I think there is the possibility of a quick increase of profitability and demand to renew investor sentiment.
Long-term catalysts for the Kogan share price
As Kogan itself says, online retail is still in its infancy in Australia, despite the large growth we have already seen.
The online retail market has reportedly grown from $26.8 billion in FY19, to $32.5 billion in FY20 and then to $44 billion in FY21. Kogan’s market share within that has increased too – in FY19 it was 2.1%, in FY20 it was 2.4% and in FY21 it increased again to 2.7%.
Kogan’s gross sales were $1.18 billion in FY21. The FY26 target is $3 billion.
Increasing gross sales should help with operating leverage and other areas of the business, helping profitability and the bottom line.
Kogan can continue to add more products, brands and categories to boost its attractiveness to customers and particularly Kogan First members.
Mighty Ape in New Zealand is an excellent extra growth avenue for the business. Whilst New Zealand isn’t a large market, it offers plenty more addressable market for Kogan to target.
Kogan First can be a key way to sell multiple services (like internet and energy) and increase the potential value of each customer.
I think that the Kogan share price doesn’t reflect the reasonable potential that the business could go on to do well into the future, assuming a decent level of profitability returns in the 2022 calendar year.
CommSec’s estimate puts the Kogan share price at just 19x FY24’s estimated earnings. If Kogan can keep growing its gross sales by at least 20% per year over the next few years, it could be a good performer from here (with volatility from time to time).
