Kogan.com A Volatile Ride To The Top Or Bottom?

Since 2019, Kogan.com embarked on a tumultuous journey, propelled by the surge in online shopping amid restricted retail access. This shift expedited anticipated growth, bolstering revenues and profits substantially from 2019 to 2021.

Alot of growth expected from the future was prematurely brought forward as people satisfied their retail addiction online. During this period from 2019 to 2021, Kogan.com saw its revenues and profit increase dramatically.

The fervor surrounding Kogan.com attracted numerous investors as future growth was brought forward. The belief was that this growth would continue in its sustainable trajectory. Which in hindsight was betting on the world economy never opening back up and social interaction to cease.

Kogan.com market valuation skyrocketed from $500 million to over $2 billion in just a year, accentuating the market’s exuberance and momentum-driven investment.

During a one year time frame, the market valued Kogan.com over 4 times its previous initial value from a single years performance.

Was the market over exuberant and expecting too much? Or was it simply people trying to ride the stock momentum as it continued to go up in price? It is impossible to know what people do in the market or their intentions.

The subsequent fluctuations in Kogan.com’s share price, oscillating between $2.70, $8, and under $4 within months, underscore the market’s unpredictability. The recent 25% decline post-quarterly update serves as a stark reminder of stock volatility.

I bring this up now because Kogan.com most recent quarterly business update sent its share price down 25% in a single trading day. We must not fail to realise that stocks and businesses are not the same thing.

Kogan.Com The Business Not A Ticker Symbol

Stocks detach the idea that businesses are real tangible assets that will continue to operate regardless of its share price. The problem with public companies is that you are able to get daily quotations of their stock prices 5 days a week.

While liquidity is the main attractiveness to invest in stocks it is also its Achilles heels. That is because there are many different market participants that have different intentions. This causes market volatility and in certain stocks, this volatility can be substantial.

Peter Lynch, hedge fund manager for Magellan for 13 years is known as one of the most successful investors of all-time. He reveals that to do well in investing you need to “know what you own and why you own them”.

It is such a simple concept yet many people I suspect have no idea what they buy. Instead they see these businesses as ticker symbols that fluctuate in price.

This may also be a reason why many investors capitulate and sell their stocks when they have fallen substantially in price. Then kick themselves when they recover in value later on.

Kogan.com is no exception and has seen tumultuous price volatility during the last few years. To put it into context, Kogan in 2019 had a market capitalisation of $524 million, and in 2024 is valued at $528 million. Looking at just these two values, Kogan.com has not grown the last 4 years.

However we know that during that time, Kogan was also once valued at $2 billion. So which of this is true?

While the share price only tells you what someone is willing to pay for at a point in time. We need to take closer look at Kogan.com, the business.

Kogan.com Business Economics

Before delving into an investment, it’s crucial to understand how the business generates revenue. If this question remains unanswered, perhaps reconsider the suitability of the investment.

Initially, Kogan.com operated as a first-party retailer. However, over time, it transitioned into a hybrid model, encompassing both retail and a platform. Essentially, Kogan.com sought to diversify its revenue streams beyond its own products.

To streamline scalability and adopt a capital-light approach, Kogan.com introduced the Kogan Marketplace. Here, third-party businesses leverage the online platform to showcase their products. This strategy reduces inventory burdens while offering consumers a wide array of products, enhancing operational efficiency and lowering warehousing costs.

Furthermore, Kogan.com positions itself as a data-centric company, leveraging data to enrich customer experiences, predict product demand, manage inventory, and optimize sales performance.

The Kogan Marketplace has witnessed significant growth, now constituting over 50% of company sales and contributing 70% to gross margins. Additionally, Kogan.com’s verticals, including Kogan Money, Insurance, Mobile, and Travel, offer scalable revenue streams by leveraging major third-party partnerships.

Monitoring Kogan.com’s performance, particularly through its Kogan FIRST loyalty program, provides valuable insights. A growing subscriber base signals positive performance. The Kogan FIRST model reallocates marketing investments to enhance customer retention, offering better prices and loyalty rewards, thereby optimizing unit economics and minimizing customer acquisition costs.

Price Vs. Value What Say You Kogan?

Trading in stocks often leads to volatility, yet businesses remain steadfast in their operations despite market fluctuations.

When evaluating our stock investments, we must ponder whether underlying business fundamentals have shifted or if market dynamics are at play.

Four years ago, Kogan.com traded at roughly $5 per share, a figure that remains relatively stable in 2024. Over this period, its outstanding shares increased from roughly 93 million to 100 million.

Despite this, Kogan.com’s market capitalization hovers around $500 million. Throughout 2019 to 2024, its share price oscillated between a high of $23 and a low of $2.70.

These fluctuations suggest a range within which Kogan.com’s value likely lies. Were investors overly optimistic during the pandemic, driving prices to $23? Conversely, did pessimism lead to undervaluation at $2.70?

Both possibilities hold merit, or they may all be erroneous. As Buffett aptly remarked, the stock market functions as a voting machine in the short term and a weighing machine in the long term.

During a business’s early growth stages, it grapples with challenges and hurdles, which investors consider when determining its worth.

While Kogan.com has faced setbacks, reflected in its stock price, it remains a robust business with potential for substantial growth under competent management.

Simple Valuation exercise on Kogan.com

Using a P/E valuation method offers a straightforward approach to assessing Kogan.com’s potential value. Essentially, you project a revenue growth rate and expected net profit margin for the business.

Let’s consider an example: assuming Kogan.com’s revenue by the end of 2024 reaches approximately $500 million. Applying a conservative 10% growth rate over the next 5 years and a net profit margin of 5%, we estimate revenue at $805 million and net profit at $40.2 million.

Additionally, assuming a 10% increase in outstanding shares to 110 million, we calculate an earnings per share (EPS) of $0.365. Multiplying this by a P/E ratio of 20 yields a share price of $7.32.

To determine the present value, we discount the $7.32 share price using a 10% discount rate, resulting in an intrinsic value of $4.54 for Kogan.com.

If you anticipate Kogan.com growing faster than 10% annually, its value could exceed this estimation. However, valuations are not exact and can fluctuate based on growth projections and discount rates.

Key Takeaways

• The stock market divorces business value from share price, driven by daily fluctuations. Peter Lynch’s advice emphasizes understanding investments beyond its ticker symbols.
• Understanding how a business generates revenue is paramount before investing. Knowing what you own and why you own it will help you succumbing to emotion trading.
• Market volatility is inherent in stock trading, yet businesses maintain stability. Evaluating stock investments involves assessing underlying business fundamentals versus market dynamics.

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