Farfetch (NYSE:FTCH) has burned many investors since its IPO last September. The London-based luxury e-tailer went public at $20 per share, but it was subsequently cut in half as concerns about its slowing growth and widening losses piled up.

Farfetch's second-quarter earnings report, released on Aug. 8, featured another loss, a big acquisition, a decision to limit promotional activity, and a mediocre outlook. It also caused the stock to plunge more than 40% in a single day.

Are the bears right about Farfetch's future? Or is there room for the bulls to make a comeback?

Bull and bear figurines on a table.

Image source: Getty Images.

Understanding Farfetch's business

Farfetch's marketplace, which features over 1,100 brands, connects sellers in over 50 countries to customers in more than 190 countries. Farfetch also offers e-commerce and analytics tools to enterprise customers via its Farfetch Platform Solutions service.

Farfetch also owns Browns, a boutique that operates two brick-and-mortar stores in London, and its website BrownsFashion.com. At the end of 2018, Farfetch acquired Stadium Goods, a New York-based sneaker and streetwear reseller, for $250 million.

In its second-quarter report, Farfetch announced that it would acquire New Guards Group, the Milan-based fashion company that owns luxury streetwear brands like Heron Preston, Off-White, and Palm Angels. That acquisition was surprising since it marked a major shift from the company's asset-light model of connecting sellers to buyers.

Farfetch generates most of its revenue by charging sellers a commission of about 25% per sale. Farfetch doesn't have much room to raise that rate, and its losses are widening as it acquires more capital intensive businesses.

Moreover, Farfetch faces stiff competition from larger e-commerce marketplaces with dedicated luxury marketplaces (like Alibaba's (NYSE:BABA) Tmall Luxury Pavilion) and first-party e-commerce sites from luxury giants like LVMH. Those headwinds could prevent Farfetch from ever achieving profitability.

Three young women check their smartphone as they shop.

Image source: Getty Images.

How fast is Farfetch growing?

Farfetch's growth can be measured in gross merchandise volume (GMV), or the value of all goods sold across its platforms, its number of active consumers, and its average order value (AOV).

YOY growth

Q3 2018

Q4 2018

Q1 2019

Q2 2019

GMV

52%

50%

43%

44%

Active consumers

42%

45%

64%

56%

AOV*

4%

(5%)

(7%)

0%

YOY = Year-over-year. Source: Farfetch quarterly reports. *Excludes Stadium Goods.

Farfetch's growth in customers and GMV remains robust. However, its AOV stalled out at around $600, which doesn't give it much room to increase its revenue per customer when its user growth decelerates.

Moreover, Stadium Goods' AOV -- which wasn't included in Farfetch's marketplace AOV -- came in at just $336 in the second quarter. New Guards Group should also have a lower AOV than Farfetch's core marketplace.

The addition of those two subsidiaries is worrisome since they generate less revenue per customer and operate at lower margins than Farfetch. Here's how Farfetch's revenue growth stacked up against its adjusted EBITDA margins over the past year:

YOY growth

Q3 2018

Q4 2018

Q1 2019

Q2 2019

Revenue

52%

55%

39%

43%

Adjusted EBITDA margin

(29.3%)

(8.6%)

(20.7%)

(20.8%)

YOY = Year-over-year. Source: Farfetch quarterly reports.

As a result, Farfetch's adjusted EBITDA loss widened from $25.4 million to $37.6 million between the second quarters of 2018 and 2019. Its after-tax loss widened from $17.7 million to $89.6 million, which means that it spent roughly $3 to generate every $2 in revenue. Those losses will likely widen as it takes on New Guards' design, production, and marketing expenses.

The bears are winning this battle

Farfetch plans to rein in promotions to improve its margins, but that strategy could throttle its growth in active consumers, and its stagnant AOV growth indicates that shoppers aren't interested in spending more. Farfetch's partnership with JD.com (NASDAQ:JD) might widen its moat against Alibaba or first-party websites in China, but those gains could be offset by the country's ongoing economic slowdown.

Farfetch expects its total GMV to rise 50% this year, but that marks a slight deceleration from its 55% growth in 2018. It expects a full-year adjusted EBITDA margin of negative 15%-17%, which only marks a slight improvement from a negative margin of 19% in 2018.

This indicates that Farfetch's cash and equivalents, which already plunged 35% from the end of 2018 to $679 million at the end of the second quarter, could dry up and trigger a secondary offering. All these factors indicate that the bears are likely right about Farfetch and that any bounce from these all-time lows could be short-lived.