MENU Ltd (ASX:KGN) is up 500%, but where next? 

The share price of Ltd (ASX: KGN) has been absolutely flying. 

In the last 12 months, it’s up 500%.  From $1.50, it has shot into the stratosphere and now sits around $9. 

Shares were listed on the ASX almost 2 years ago, but barely moved in the first 12 months.  More recently, the market is wholeheartedly convinced this is a high-growth company. 

Is it a bubble? Or is it just the start? Let’s dig a little deeper… 

What is Ltd (ASX: KGN)? 

Kogan is Australia’s largest online retailer which operates at incredibly low costs, passing them on to the customer in the form of lower prices. 

The founder, Ruslan Kogan, started the company from his garage in Melbourne by selling televisions online, which he bought direct from a Chinese manufacturer. 

These days Kogan has greatly expanded its product range to include insurances, travel packages, as well as mobile and nbn plans. 

The company is continually looking for new products and services where it can ‘clip the ticket’, while keeping its prices and costs as low as possible. 

By shunning the brick-and-mortar strategy of most retailers, Kogan is able to operate more efficiently with lower overheads.  

Growth, valuation and risk 

With the current share price of around $9, shares are trading at a price-earnings ratio of 82.  That’s definitely extreme, priced for perfection you could say. 

Kogan will need to grow at strong double-digit levels for quite a while to justify this valuation. 

The last half-year result showed active customers increased by 40%, revenue up 46%, and net profit after tax (NPAT) increased by 119%. 

If the company can keep delivering results like this, the current share price could prove reasonable. 

But if the growth rate starts slowing, or the company has a weak half, shares will likely be ‘de-rated’ to a much lower valuation. 

The largest risk to Kogan is probably the hungriest retailer of them all, Amazon. 

With Amazon now in Australia, it’ll be aiming to undercut local retailers to take market share.  There’s a decent chance Amazon will be able to offer lower costs than Kogan for certain products. 

Foolish takeaway 

The Kogan story is pretty impressive. I must admit, I’ve recently become a customer myself – the company lured me in with an irresistibly cheap mobile plan. 

Looking at the share price today, it’s not something I’d buy. I’d be very tempted to take some money off the table if I was a shareholder. 

Kogan may turn out to be a massive long-term winner (so far it has been), but it will likely be a bumpy ride. 

If you can handle the volatility and believe the company can continue its low-cost strategy in an increasingly competitive space, you may do very well over time. 

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Motley Fool contributor Dave Gow has no position in any of the stocks mentioned. The Motley Fool Australia has recommended ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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