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Can Kogan.com Ltd climb even higher?

Kogan is a divisive company. Depending on who you speak to, it is either overvalued and doomed to be subsumed by Amazon’s expansion into Australia, or a forward thinking disruptor that will beat American giants at their own game. This duality of opinion has  been reflected in recent share price volatility; after nearly hitting the $10 mark in early June, Kogan closed at $6.82 on Friday. So what has been driving this action?

Changes in Director Holdings

In early June, media speculation regarding a large sale of shares by company directors Ruslan Kogan and David Shafer depressed the company’s share price, which was a hair’s breadth from the elusive $10 mark.

Interestingly, this speculation occurred in the midst of the company’s announcement that it was moving into the white goods space, further diversifying its revenue streams and causing a run in the share price of nearly 8 percent.

In response to the speculation, Kogan made an announcement stating that no such transactions had occurred, and that Mr Kogan and Mr Shafer were ‘not currently in discussions to sell any shares’. The key word being ‘currently’. Both of the directors have since sold large parcels of their shares and speculation abounds.

There are two competing narratives. The sale of shares may be a bad omen, indicating the directors are seeking to hedge their positions and are a little more pessimistic as to the future performance of the company. It may also be a harmless example of company directors cashing in for their hard work after a year of stellar results.

Amazon Speculation

Amazon’s recent expansion into the Australian market is making investors question whether Kogan’s strong performance can continue in the wake of the American giant’s expanding position, which has contributed to the recent volatility. In a difficult retail environment, Kogan has demonstrated strong revenue growth, but there is a looming question regarding the company’s long-term future.

Kogan’s answer to the question is diversification of revenue streams. The idea is simple; use the extremely low cost of customer acquisition that Kogan has created through its strong online presence to partner with companies in other sectors in a mutually beneficial arrangement. Those partners then have access to new customers, while Kogan investors gain access to infrastructure (such as a mobile network) without the corresponding investment.

The question is whether ventures such as the recent forays into pet insurance and white goods, or  the expansion into the New Zealand Mobile market will be enough to weather the storm as the retail sector continues to tighten. Although the outlook is tougher than ever before, Kogan and his team have a track record of repeatedly out peforming expectation.

Foolish takeaway

For those that believe in the Kogan model’s ability to deliver revenue growth into the future despite the headwinds, Kogan may still be an attractive proposition. However, Kogan’s P/E ratio of 187.36 demonstrates that a large portion of the company’s market capitalisation is contingent on forward performance and future profit development, and for my money there are safer options in other sectors for savvy investors.

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Motley Fool contributor Tom Clelland has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Kogan.com 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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