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Why Farfetch Shares Dropped 12% on Friday

By Daniel Miller – May 15, 2020 at 11:37AM

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The stock dropped even though the luxury-goods site beat analysts' estimates.

What happened

Shares of Farfetch (FTCH 1.03%), a technology platform for luxury fashion that connects creators and consumers, are down 12% on Friday even though the company topped analysts' estimates during the first quarter.

So what

Revenue increased 90% year over year during the first quarter to $331 million, easily beating analysts' estimates of $313 million. Farfetch's adjusted earnings per share checked in with a $0.24 loss, which was clearly better than the loss of $0.35 per share analysts estimated. First-quarter gross merchandise value (GMV) was up 46% versus the prior year, with its digital platform GMV up 19%.

women's fashion clothing

Image source: Getty Images.

In a press release, CFO Elliot Jordan said: "I am very pleased by our financial results in first quarter 2020, which highlight the strength of our business model. GMV growth across the quarter, stable unit economics and cost base leverage means we have significantly outperformed on Adjusted EBITDA, continuing on our path to profitability." 

Now what

The main question for investors right now is: Will COVID-19 delay Farfetch's path to profitability? The answer is impossible to say with certainty, especially in a hard-hit consumer discretionary sector, as nobody can yet understand the full impact of COVID-19 and how long the economic effects will linger.

But management still believes the company is on target for its 2021 adjusted EBITDA profitability. It has cash and cash equivalents of $422 million at the end of the first-quarter, and $400 million in convertible senior notes issuance from April, which bolsters its liquidity and ability to weather the COVID-19 storm. Despite topping analysts' estimates, today's 12% decline is likely due to the added uncertainty around a currently unprofitable company. Take volatility during the COVID-19 pandemic with a grain of salt.

Daniel Miller has no position in any of the stocks mentioned. The Motley Fool recommends Farfetch Limited. The Motley Fool has a disclosure policy.

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