The Kogan.com Ltd (ASX: KGN) share price has been under pressure in 2021.
Since the start of the year, the ecommerce company's shares have lost 53% of their value. This has been driven largely by inventory issues after management failed to predict a slowdown in sales once bricks and mortar stores reopened.
This led to significant inventory issues, which weighed heavily on its margins and ultimately the Kogan share price.
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Is the Kogan share price good value now?
Given the weakness in the Kogan share price this year, investors may be wondering if it is good value now.
To address this question, we asked Motley Fool's Chief Investment Officer Scott Phillips for his thoughts on valuing Kogan's shares. Phillips said:
"Kogan, and other companies with fast growing sales, can be difficult beasts for investors to accurately value. The unknowns include the rate of annual growth, in the short-medium term, and for how long each company can continue to grow at those elevated rates, before they become mature companies and growth becomes more moderate. Obviously the longer, and stronger, that growth, the better.
The next consideration is the level of profitability a company can sustain, usually expressed as a percentage of sales. The higher the better, obviously. Here's where it gets tricky. If you think Kogan can grow sales at, say 20% per annum for 5-10 years, before slowly falling to, say 5% per year over the decade thereafter, and can deliver a profit margin of close to 10% of sales, you have a much more valuable business than if growth falls to 5% p.a. within the next couple of years, and it can only bank 6% of that as profit."
The difficulties of growth investing
Scott Phillips highlighted Kogan's shares as an example of the inherent difficulties of growth investing.
"The challenge for investors is that even those two scenarios — and the range of potential outcomes is even wider — present very different valuation stories. That's 'growth investing' for you — it's impossible to be precisely accurate, so you're aiming to be roughly right. And Kogan has one more wrinkle: some costs in the most recent results should be 'one-offs' if management is right, meaning the starting point is unusually low, and it's best to adjust for those factors if you don't think they'll happen again in future."
The bottom line
Overall, Phillips notes that whether or not the Kogan share price proves to be cheap will depend on which scenario unfolds. He concluded:
"Bottom line, though: If you think Kogan can deliver something closer to the first scenario, it's probable that shares are cheap, today. If they can't, and the future looks closer to the second, there may not be much valuation upside from here."
The opinions expressed in this article were as at November 2021 and may change over time.
