3 reasons why Kogan (ASX:KGN) shares could be a buy

This article is about 3 reasons why e-commerce ASX share Kogan.com Ltd (ASX:KGN) could be a buy for a growth-focused portfolio.

| More on:
ASX e-commerce share price represented by miniature basket of parcels sitting on laptop keyboard

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

sdf

There are a number of reasons why growth investors might like Kogan.com Ltd (ASX: KGN) shares.

What does Kogan.com do?

As the name might suggest, Kogan.com is an internet-based business. Specifically, it's an e-commerce company that sells a wide variety of products and services through its platform.

In terms of retail, it sells things from categories like TVs, computers, phones, cameras, heating and cooling, appliances, home and garden, furniture, office supplies, toys, video games, clothes and shoes, health and beauty, sports, tools, cars, alcohol, groceries and more.

In terms of services, it offers things like car insurance, home insurance, credit cards, home loans, internet, mobile and energy.

Here are some positives about the e-commerce ASX share:

Kogan First

Kogan First is a membership program that gives members free delivery on 1,000s of products. Members can also be upgraded to express shipping at no extra cost. It offers priority customer service and exclusive member-only deals and discounts.

The ASX share says that this membership program creates a large and growing community of loyal customers who access free shipping and a range of exclusive benefits.

According to data from the company, Kogan First members purchase on average much more often than the non-members, demonstrating loyalty to the platform, and also demonstrating the significant savings available through the loyalty program.

Kogan.com is also hoping that these members will be more likely to sign up to the extra services that the company offers, which would make those members even more valuable to the business.

Rising margins

A business that can increase profit margins is likely to be able to increase its bottom line profit, which may be able to help the Kogan.com share price.

Kogan.com's gross margin was 17.9% in FY17, 19.5% in FY18, 20.7% in FY19 and 25.4% in FY20. That is steady progression for the business over consecutive years.

The earnings before interest, tax, depreciation and amortisation (EBITDA) margin has also been increasing with the company's improving operating leverage. The EBITDA margin was 4.3% in FY17, 6.3% in FY18, 6.9% in FY19 and 9.3% in FY20.

One of Kogan.com's preferred profit measures is adjusted EBITDA, which excludes unrealised foreign currency gains or losses, equity-based compensation and one-off non-recurring items. The adjusted EBITDA margin has also been improving – it was 5.2% in FY17, 6.3% in FY18, 7.2% in FY19 and 10% in FY20.

Diversifying earnings

Kogan.com is constantly working to add to its earnings. It's adding more products on its main site. But it has also been making acquisitions to grow the business as well.

It wasn't too long ago that Kogan.com acquired quality furniture business Matt Blatt and continue it as an online-only offering.

Kogan recently announced that it was expanding into New Zealand by buying the online retailer Mighty Ape for AU$122.4 million. It specialises on gaming, toys and other entertainment categories.

Before the impact of synergies, Mighty Ape has FY21 forecast revenue of AU$137.7 million, forecast gross profit of AU$45.7 million and forecast EBITDA of AU$14.3 million. This would represent year on year growth in revenue, gross profit and EBITDA of 43.7%, 58.1% and 254.1% respectively for Mighty Ape.

Kogan.com is expecting to generate significant revenue and cost synergies across plenty areas of the business after the acquisition.

How expensive is the Kogan.com share price right now?

Using Commsec earnings projections, it's valued at 25x FY23's estimated earnings.

In the AGM trading update it said that in the first four months of FY21 to October 2020 it had seen gross sales grow by 99.8%, gross profit went up 131.7% and adjusted EBITDA jumped 268.8%. Management said that 'product divisions' and the Kogan marketplace is generating a strong performance as customers continue to shop online.

Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Kogan.com ltd. The Motley Fool Australia 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.

More on Growth Shares

Three happy office workers cheer as they read about good financial news on a laptop.
Growth Shares

5 ASX growth shares to buy and hold

Analysts think these shares could be top picks for investors looking for growth options.

Read more »

Two players on a field pump their fists in the air, indicating two of the best
Growth Shares

The ultimate buy and hold ASX 200 shares for long-term investors

These buy-rated shares could be great options for investors with a long time horizon.

Read more »

A bearded man holds both arms up diagonally and points with his index fingers to the sky with a thrilled look on his face over these rising Tassal share price
Growth Shares

3 unstoppable ASX shares to buy and hold for the next decade

These shares are going places over the remainder of the decade and beyond.

Read more »

Four piles of coins, each getting higher, with trees on them.
Growth Shares

2 high-growth ASX shares to buy today: brokers

These stocks have a strong growth outlook.

Read more »

Two university students in the library, one in a wheelchair, log in for the first time with the help of a lecturer.
Growth Shares

2 top-quality ASX shares to buy for beginner investors

These stocks could be a great place to start investing.

Read more »

A man in full American NFL playing kit crouches over with his arms across his chest in a defensive stance against a dark background.
Growth Shares

Here's why these two ASX 300 shares are great ones to own

These businesses are two of the fastest-growing stocks in the ASX 300 and are liked by fund manager WAM.

Read more »

A smiling businessman in the city looks at his phone and punches the air in celebration of good news.
Growth Shares

3 ASX growth shares you'll wish you bought in June

Analysts think these shares could be destined for big things in the future.

Read more »

Father and daughter with hands on a small plant.
ETFs

Focused on growth? Here are 3 ASX ETFs to consider

Growth investors must ignore the current market noise about tariffs and focus on the long-term horizon.

Read more »