Incognito Watchlist,  Kogan

Estimating the Value Of Kogan: Breakdown in 5 Minutes

The value of Kogan is worth digging into especially if you are thinking of investing in the business.

It is safe to say that Kogan’s share price has been on a roller coaster journey over the last couple of years. At a share price of $26 at its peak in October 2020 investors may have got too ahead of themselves.

But the opposite could also be said that in another world, that price would have gone up to $40. However, in our timeline that is not the case and the share price went to a 52 week low of $2.66.

So we can rationalise that somewhere in between $2.66 and $40 is a fair value for Kogan. But how do we really know and what can we do to make better investment decisions?

When looking for businesses in the stock market, I look for investments that have asymmetric risk-reward. In simple words the down side risk is 1 and the upside potential is astronomical.

The value of Kogan caught my eye when its price dramatically rose to $26, but what piqued my genuine interest was when it came crashing all the way back down.

No business no matter how excellent they are is worth an infinite amount. Therefore putting a fair value target on a business is an important exercise for me. Below we will look at some ways that I approach when valuing Kogan.

Key Assumptions

Although forecasting is a fools exercise because you are almost by definition going to wrong, it must be done. In saying that, when you are looking to invest in a business you are expecting it to grow and be bigger in the future.

The problem lies in the assumptions that you make in growth rates and expected business economics. Be too conservative and you never buy a stock, over optimistic and you will buy at any price.

Kogan is still a growing business, and a very young one at that. That being said the future of the business is still quite uncertain compared to larger established business.

Cashflows are harder to predict and also profitability will be volatile in the following years. This is especially true for companies that are re-investing and spending a lot on capital expenditures.

To determine the value of Kogan, a discounted cash flow may not be the best tool to use because you have to make up a boat load of assumptions.

A simple valuation method you can use is the PE Valuation Method which uses two simple variables to determine whether Kogan is worth investing in.

Value of Kogan PE Valuation Model

The PE Valuation method requires you to estimate the revenue growth of Kogan and applying a suitable net margin percentage. Using the template I created which is available here, I expect that Kogan will be able to make $71.5 million in net profit in 5 years.

The next step will be to divide the net profit by the shares outstanding to derive the EPS.

Apply an assumed P/E ratio and multiply that by the EPS to get your target price.

Based on my inputs, Kogan is currently undervalued by 27% with a $6.22 valuation. So in order for me to achieve a 10% return over the next 5 years, I would like to buy Kogan at $6.22 target price.

Value of Kogan DCF Method

Despite what I said previously about DCF not working well for companies like Kogan, it is a good exercise to use to model what a business needs to do to get to a certain valuation.

Below is an excel template available here of a DCF for Kogan which I calculated using conservative assumptions. This resulted in a fair value price of $8.17.

value of kogan

It is worth mentioning that these valuations are only as good as your assumptions. There are high probabilities that your assumptions are completely wrong.

Estimating Kogans Fair Value

With a PE Valuation of $6.22 and a Discounted Cash Flow Model of $8.17, you can conclude that Kogan is currently undervalued at its current price of $4.49 (23/05/23).

Despite these valuations using assumptions that are likely to be wrong. Bu it is a positive sign that both valuations signal an undervalued rating.

However, things may change in the future and with that my assumptions will also change. It is good practice keep up to date with company announcements to see how your company is tracking along.

In the wise words of John Maynard Keynes “When the Facts Change, I Change My Mind. What Do You Do, Sir?”.

Incognito Wealth – Investing Tools

Need help with investing in the stock market or personal finance? Visit my Etsy store for digital excel templates. Simplifying finance so that everybody can reach financial independence.

Incognito Wealth - Financial Independence One Investment at a Time

*Disclaimer – Incognito Wealth currently holds shares in the companies mentioned in this post. This material should be used for research and entertainment purposes only. Incognito Wealth in no way shape or form intends this blog post as financial advice. Please consult your own professional financial adviser or accountant for investment decisions.