The Kogan.com Ltd (ASX: KGN) share price has done exceptionally well since the start of 2023, rising by more than 70%, as we can see on the chart below.
There are a couple of things to say about this that can also be applied to any business that's seeing a strong rise in the share price.
Just because something has gone up doesn't automatically mean that it's expensive.
However, I'd also say a valuation can't keep going up forever because a company's price/earnings (P/E) ratio needs to make sense. When businesses provide financial updates, this can challenge or delight investor perceptions of what's going on.
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Good times return for the Kogan share price
It is curious that during a period of rising interest rates – which, in theory, hurt Kogan's customers and valuation – investors have bid up the e-commerce company's valuation.
Kogan's profitability was seriously harmed when it was caught with too much inventory following the strongest period of online shopping demand during COVID-19. The end of lockdowns meant many shoppers returned to normal for bricks and mortar retailers. This led to such a large hit to Kogan's profit that it reported losses.
Kogan recently gave an update for the second half of FY23 which showed that while gross sales declined 22.5% year over year to $373.7 million, its gross profit margin improved by nine percentage points to 34.4%. This resulted in gross profit only declining 3.6% to $73.6 million.
Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) increased $9.6 million year over year to $11.2 million. At the same time, adjusted earnings before interest and tax (EBIT) rose $11.3 million to $3 million (up from a loss of $8.3 million). I think this is good for the Kogan share price.
Why we can remain positive
While the sales decline is disappointing, it's great to see profit growth has returned because profit is what investors usually focus on to value a business.
The bottom line is projected to improve in each of FY23, FY24, and FY25. While it would be preferable the business would be making more profit than it currently is, the trends are looking positive.
Kogan First members, those in Kogan's customer loyalty program, rose to 401,000 as at 30 June 2023. That's up from 372,000 as of 30 June 2022. The company had 408,000 Kogan First members as of 26 July 2023. Not only are these customers generating membership fees for Kogan, but they hopefully signal a future increase in revenue if they collectively spend more on the website.
The company has significantly improved its inventory position, which had fallen to $68.2 million as of 30 June 2023. This was an improvement of more than 57% since 30 June 2022. It seems it has completed the right-sizing of inventory to the current levels of demand.
To me, if Kogan can keep growing earnings then it could continue exciting investors. That said, I don't expect the next seven months to be as good as the last seven for the Kogan share price, partly because it has already gone through a significant recovery.
