This top broker thinks the Kogan share price has 35% upside

Kogan shares have lots of upside according to one leading broker.

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Key points

  • The broker UBS notes the difficult conditions for Kogan and is currently ‘neutral’ on the business
  • However, it thinks that the Kogan share price could rise more than 30% from here
  • Kogan has been growing its number of active customers and members

The Kogan.com Ltd (ASX: KGN) share price has had a torrid time over the last year.

Kogan shares have fallen by around 70% in the past 12 months. In just the last month alone, shares in the online retailer have plunged around 15%.

It’s no secret that the e-commerce company has been suffering from several different factors. Sales growth has been declining. It has had too much inventory. Marketing expenses are elevated as it tries to keep shifting products.

Latest business update

The latest insight for investors was in the FY22 third-quarter update. It said that total third-quarter sales were down 3.8% to $262.1 million year-on-year.

However, there were a handful of positives in the growth numbers. Kogan Marketplace revenue rose 19.8% to $78 million, Mighty Ape sales went up 25.8% to $35.4 million, and Kogan First revenue went up 67.9% to $4.2 million.

Gross profit fell by 11.2% to $41 million in the third quarter. Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) fell by 110.5% to a loss of $0.8 million. Profitability (or lack of) can have a significant impact on the Kogan share price.

However, the company did point out that its active customers grew by 3.6% year on year to 4.1 million, with Kogan First members rising by 264% year on year to 328,000 as of 31 March 2022 – this was a growth of 19.7% since 31 December 2021. It had 345,000 Kogan First members at the end of April 2022.

The company noted that over the next year, it will be “recalibrating its operating costs in line with current growth levels to support a return to the historical operating margins previously generated.”

Kogan’s CEO and founder, Ruslan Kogan, said that while market conditions were challenging right now, it had laid foundations over the past 16 years to put it in good stead today.

Is the Kogan share price an opportunity?

After evaluating the latest update from Kogan, the broker UBS decided the rating on Kogan would be ‘neutral’, and it reduced its price target to $4.30 because the update was worse than expected. However, this price target implies an upside of more than 30%.

The broker thinks that gross profit is going to be hurt because of excess stock. It’s not expecting Kogan to materially improve its profitability until the second half of FY23 (or even later).

Based on a return to profitability in FY23, UBS thinks the Kogan share price is now valued at 45x FY23’s estimated earnings.

Another broker, Credit Suisse, is also negative about the company’s short-term outlook with regard to profitability and costs. However, while it rates it as ‘underperform’, the Credit Suisse price target of $3.75 implies a potential rise of almost 20% over the next year.

Time will tell if the brokers are correct about how much the Kogan share price will rise over the next year. If UBS is right about a return to profitability for Kogan next year, then it could provide a boost for the ASX share.

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. has positions in and has recommended Kogan.com ltd. The Motley Fool Australia has positions in 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 Scott Phillips.

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