ASX e-commerce shares are being shot down left, right, and centre after COVID-19 created unrealistic earnings expectations for FY21.
The Kogan.com Ltd (ASX: KGN) share price joins its embattled peers Redbubble Ltd (ASX: RBL) and Temple & Webster Group Ltd (ASX: TPW) in the bargain bin after falling 20% last week.
With the Kogan share price falling almost 50% year-to-date to 11-month lows of $10.30, this broker has made the bold call to buy the dip.
Why did Kogan fall off a cliff?
Kogan's update reflects the broader ongoing reversal of supercharged COVID-19 driven earnings. Morgans has described what the market is currently witnessing as a cycle of tough comparisons to periods with COVID-19 tailwinds and "unlikely to be repeated" sales.
Kogan's update looked promising at face value but revealed that earnings before interest, tax, depreciation and amortisation (EBITDA) fell more than 24% compared to the prior corresponding period.
As a result of lower customer demand, the company will have to store larger than expected levels of inventory, which could potentially lead to weaker margins in the near term.
Credit Suisse rates the Kogan share price as outperform
Credit Suisse believes the ongoing difficulties associated with stock levels returning to normal and cycling of strong sales growth is only temporary. Looking past the near-term slowdown, the broker is positive on Kogan's medium-term outlook and opportunities.
Credit Suisse observed that the number of active customers continues to expand, but sales momentum appears to have slowed at a faster rate than expected. The broker retained an outperform rating and reduced its target price from $20.85 to $17.93.
With the Kogan share price fetching $10.30 at the time of writing, this represents a significant upside of 69%.
Foolish takeaway
While Credit Suisse has put forth an eye-watering 69% upside to the Kogan share price, investors should also remember the risks of trying to 'catch the knife'.
Shares such as the A2 Milk Company Ltd (ASX: A2M) and AGL Energy Ltd (ASX: AGL) are classic examples of seemingly quality shares that have dipped lower and lower.
