Why Farfetch Is a Top Global E-Commerce Stock

With the sell-off in high-flying tech stocks in recent weeks, paying a company like Farfetch (FTCH) some attention hasn't been popular. Share prices of the luxury e-commerce platform are down some 25% from all-time highs as of this writing -- this in spite of a solid conclusion to 2020 and the company reporting it turned profitable on an adjusted basis for the first time. With more good things on the horizon for Farfetch, I think this top high-end goods e-commerce platform is worth a look.

A transformational year for luxury

Luxury sales are nearly a $300 billion-a-year industry, but historically one highly reliant on in-person sales. Given the state of affairs, suffice it to say some e-commerce updating was in need here -- and Farfetch was ready. It capped off a huge year with a reported 43% year-over-year increase in gross merchandise value (GMV) sold in the fourth quarter to $1.06 billion. The resulting revenue was $540 million, a 41% increase.

Image source: Getty Images.

And while the bottom line isn't of primary importance right now (this is an all-out growth company), adjusted EBITDA turned positive in Q4 to $10.4 million, compared to negative $17.9 million the year prior.  

After acquiring luxury brand holding company New Guards Group in 2019 (parent of labels Off-White and Heron Preston, among others), it was nothing short of a transformational year for the luxury industry -- and for Farfetch.  

Data source: Farfetch.  

Within the total last year, Farfetch's "digital platform" (in which it works with luxury brands and retailers on their e-commerce initiatives) made up three-quarters of total revenue. First-party revenue -- in which Farfetch works directly with the brand and creators -- increased 93% to $396 million. Fulfillment revenue (warehousing and shipping services) was another standout, growing 66% to $213 million.

Still just a fraction of the massive and still-growing luxury market, Farfetch has plenty of room to continue expanding as it helps designers and retailers get up to date with the digital age.

More growth on the way at a reasonable value

Farfetch looks like it will maintain its momentum headed into the new year. E-commerce is still a tough nut to crack and lots of brands will need help managing their migration to the internet. And its entrance into mainland China with Alibaba (BABA 3.53%) has staggering potential. One analyst prediction says Farfetch's active users could balloon 10-fold in the next five years to over 30 million because of the partnership.

Maybe the estimate is, well, farfetched, but China is the world's largest destination for luxury items by a long shot. Nearly 1.4 billion people and a fast-developing middle class is an opportunity hard to underestimate for this e-commerce platform. 

But for now, shareholders will have to make do with Farfetch's 2021 estimates. "Digital platform" GMV is expected to increase 30% to 35% to $3.6 billion to $3.7 billion -- including an expected 50% to 55% year-over-year increase in Q1 as pre-pandemic financial results are lapped for one final quarter.  

As Farfetch heads into the second quarter, its growth trajectory will moderate as it starts to pass the initial boom it got when lockdowns and social distancing went into effect last spring. Nevertheless, the company sees plenty of new business in its pipeline as a new digital era dawns.

With nearly $1.6 billion in cash and equivalents on balance and the company starting to turn the corner on profitability, Farfetch stock currently trading for 11.5 times trailing 12-month sales looks like a reasonable long-term value. I remain a buyer of this top e-commerce company at these levels.