Online Shift And Own Brands Will Drive Long-Term Electronics Retail Advantage

Catalysts

About Verkkokauppa.com Oyj

Verkkokauppa.com Oyj is a Finnish online and omnichannel retailer focused on consumer electronics and related product categories.

What are the underlying business or industry changes driving this perspective?

• The continued shift toward online shopping in electronics, combined with Verkkokauppa.com’s growing one hour and fast delivery coverage to roughly 2 million Finnish consumers, is expected to support above-market revenue growth and a structurally higher share of wallet per customer.
• Strengthening partnerships and an expanded assortment with major international marketplaces, including a ramped-up Amazon cooperation with more than 10,000 SKUs and own brand stores, position the company to capture incremental international demand and increase topline revenue beyond the constrained Finnish GDP environment.
• Ongoing mix improvement from growing own brand sales, with a clear target to reach 10 percent of internal sales by the end of 2028, is likely to support higher gross margins and improved net margins as scale and brand recognition build.
• An investment-light business model focused on the technology stack, architecture and fast delivery infrastructure is expected to sustain strong cash generation. This should bolster earnings quality and enable continued margin-accretive growth investments without heavy capital intensity.
• Disciplined commercial planning, supplier terms and inventory management, already visible in the 16.6 percent margin and improved equity ratio after the consumer financing business sale, create operating leverage as volumes rise and may support further gains in operating profit and earnings.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Verkkokauppa.com Oyj's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 2.2% today to 2.1% in 3 years time.
• Analysts expect earnings to reach €12.3 million (and earnings per share of €0.27) by about December 2028, up from €10.9 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 20.9x on those 2028 earnings, up from 15.6x today. This future PE is greater than the current PE for the FI Multiline Retail industry at 19.7x.
• Analysts expect the number of shares outstanding to grow by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.81%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Finland’s persistently weak consumer confidence and flat GDP could extend longer than expected, capping discretionary spending on consumer electronics and limiting Verkkokauppa.com Oyj’s ability to sustain double digit growth in revenue.
• A prolonged shift in category demand toward back to school and other lower margin branded IT and mobile devices could dilute the contribution from higher margin own brand products and pressure gross margin and net margins.
• Intensifying competition from both local retailers and global marketplaces such as Amazon in the Nordic and Central European markets could erode pricing power, forcing more aggressive discounting and weighing on revenue growth and operating earnings.
• The strategy of rapid expansion in one hour and fast delivery services, while key to customer satisfaction, could raise logistics and technology costs faster than sales scale in new catchment areas, compressing operating leverage and net margins.
• The sale of the consumer financing business provides a one off boost to cash and equity but removes a recurring income stream, which may make future growth and profitability appear less robust once the one off gain is no longer in the comparisons, potentially dampening earnings momentum.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of €4.53 for Verkkokauppa.com Oyj based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €5.0, and the most bearish reporting a price target of just €4.3.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €585.4 million, earnings will come to €12.3 million, and it would be trading on a PE ratio of 20.9x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of €3.78, the analyst price target of €4.53 is 16.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.