Here’s why the Kogan share price has a lot of potential upside

Kogan shares could be an attractive opportunity after its fall.

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Key points

  • The Kogan share price looks good value according to some experts
  • This company is benefiting from the boom in e-commerce, particularly as more Aussies shop through online retailers
  • Kogan’s gross sales keep growing strongly and it has a long-term target of $3 billion for FY26

The Kogan.com Ltd (ASX: KGN) share price could be a significant long-term opportunity, according to the experts.

Kogan is one Australia’s leading e-commerce businesses. It has also seen its share price fall by quite a lot in recent times. The last month alone shows a decline of around 18% for Kogan. The past six months shows a drop of 34%.

A lower price does not automatically make a business a buy. However, analysts think that the business has good potential over the long-term.

How much upside does the Kogan share price have?

It is anyone’s guess what a share price is going to do over the next month or the next year. Particularly in the current volatile environment. However, brokers do like to have an estimation of where they think a share price could be in a year from the date of their latest prediction. That’s called a price target.

Both UBS and Credit Suisse have price targets on Kogan which suggest significant increases of the Kogan share price over the next several months.

UBS has a price target of $10, which implies a potential rise of 40%, though UBS just rates Kogan as a ‘hold’ at the moment. The Credit Suisse price target on Kogan is $13.88, with a buy rating. That’s a possible rise of more than 90%. Time will tell whether these price targets change after the recent volatility and interest rate worries.

Why does Credit Suisse like about the ASX share?

The broker has noted that profitability at the business was less than expected after the first four months of FY22 to October 2021. It has been focused on warehousing and marketing costs.

With warehousing, it has right-sized the inventory levels since FY21 after ordering too much stock. This reduction has brought down warehousing costs, which can be helpful for the Kogan share price.

But it has also continued to spend heavily on marketing to expand the Kogan first member base and management are confident this will have long-term benefits for the company.

The Kogan first loyalty program increased 99.7% in FY21 to 120,000 members. At the end of October 2021, this had increased to over 220,000. Kogan First members demonstrate stronger loyalty and repeat buy compared to non-members.

This increase in customers is helping the business grow its market share. Not only is e-commerce growing quickly in Australia, but Kogan’s share of that spending is also rising. The Kogan market share in FY19 was 2.1%, in FY20 it was 2.4% and this grew to 2.7% in FY21. E-commerce is expected to be a larger slice of the retail pie in the coming years.

As that might suggest, Kogan’s gross sales continue to grow, even if profitability is hampered at the moment. In the first four months of FY22 to October 2021, Kogan’s total gross sales had gone up another 19% to $432.7 million.

Long-term goals

Kogan is looking to grow its gross sales at a compound annual growth rate (CAGR) of more than 20% per annum to FY26 to get to $3 billion of gross sales.

Over the next five years, it’s also looking to reach 1 million Kogan First subscribers, not including Mighty Ape subscribers.

Kogan share price valuation

Credit Suisse’s numbers suggest Kogan shares are priced at 18x FY23’s estimated earnings with a projected FY23 grossed-up dividend yield of 4.1%.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended Kogan.com ltd. The Motley Fool Australia owns and has recommended Kogan.com ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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