Kogan IPO Flop - The Writing Was On The Wall

Kogan (KGN), the online retailer has been on the market for just over a week and is down 13%. Not the start investors in the IPO hoped for, but some argue the writing was on the wall.

If we take a look at the world’s leading online retailers and the recent Australian IPOs in this industry to see why KGN was destined to fall.

The hint of a troubled listed was in the prospectus for all to see and summarised in the Price to Earnings ratio (P/E).

P/E is a general measure of what a company’s worth, it tells investors how many years’ worth of earnings they’re buying each share for. For example a share price of $3 for a company that earns $1 per share has a P/E of 3/1, commonly referred to ‘3x earnings’, or ‘three times earnings’.

To compare Kogan against the world’s leaders:

Kogan (KGN) listed with a 67.2x 2017 P/E
Ebay (EBAY US) trades on 12x 2017 P/E
Alibaba (BABA US) trades on 25x 2017 P/E
Amazon.com (AMZN US) trades on 74x 2017 P/E

The interesting part here is that Amazon appears to be the only company in the same stratosphere as KGN. “But for anyone who follows the company, Amazon.com has decided to forsake some profitability in the near term to continually re-invest in new businesses and new markets.” says Kevin Hua co-founder of AtlasTrend.

For a retailing/industrial company like KGN to trade on a similar P/E multiple to Amazon.com implies a strong growth profile, experienced management team with a solid track record of being an industry leader. Clearly investors in the IPO have high hopes for the KGN management team.

Looking at recent ASX-listings in the same online industry as KGN; Hua notes that KGN’s float flop follows a series of similar Australian online retail companies that have recently listed and performed poorly:

Redbubble (RBL), an online retailer of art products listed in May-16 and is down 33% since then – it is forecasted to be loss making in 2017
Temple & Webster (TPW), an online retailer of furniture listed in Dec-15 and is down 87% since then – it is forecasted to be loss making in 2017 and 2018
Surfstitch (SRF), an online retailer of action sports equipment listed Dec-14 and is down 81% since then – it is forecasted to be loss making in 2017
Kogan (KGN) is down 13% in the week since listing is forecasted to make A$2.5 million in 2017.

The biggest headwind Hua notes is the smaller scale of these new companies. “These companies (recent IPOs) are competing in a domestic market that is small on an international level but is also heavily competitive when factoring in larger, traditional retailers, who are gradually building out their online presence.”

“To compete in online retailing, one of the key attributes for success is scale and it is difficult to build that scale in a domestic market – even if these online retailers offer their products to sell in other countries.” Says Hua.
“In contrast, international online retailers such as Amazon.com (AMZN US), Ebay (EBAY US) and Alibaba (BABA US) have sufficient scale to compete with traditional retailers. Of course, scale alone doesn’t determine success but what scale does allow for is a wider product range, pricing advantages, better procurement and sourcing, quicker delivery options for consumers and ultimately, profitability and better margins.” explains Hua.

Hua continues “Although these retailers are significant companies already, there is still plenty of growth in their businesses – the market expects Amazon.com (AMZN US) to grow profits by 49% in 2017 and Alibaba (BABA US) to grow profits by 26% in 2017.”

Putting KGN in perspective with the dominate world leader’s questions whether KGN will follow the in the footsteps of its domestic peers struggling to compete and destroying investor’s capital rapidly.