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Why I Just Bought More Farfetch Stock

By Nicholas Rossolillo - Updated May 21, 2021 at 5:54PM

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This top luxury e-commerce business expects to continue growing at a rapid pace this year.

2020 was a boon for e-commerce companies. When people were forced to stay at home, online shopping adoption among global consumers took a massive leap higher in the last year. Even the luxury market benefited. Sales for high-end online marketplace Farfetch (FTCH -10.33%) surged 64% in 2020 despite the effects of the pandemic. Now lapping that boost in sales due to lockdowns, Farfetch is proving that increasing activity on its platform is more than just a pandemic trend. I added to my position after the first-quarter earnings report. 

A great start to the "pandemic unwind"

After helping bridge the divide between the pre- and post-pandemic worlds last year, the digital economy has taken a hit this spring. Investors worry that consumers will ditch the online businesses they were using during lockdowns as the global economy slowly reopens. I'm not convinced that will happen. New habits have been created in the wake of COVID-19, and shopping in particular will never be the same.

Young woman using a laptop in a coffee shop.

Image source: Getty Images.

Farfetch indicated as much when providing financial guidance for full-year 2021. It expects gross merchandise value (GMV) -- the value of all goods sold -- to increase between 35% and 40% this year. Not only does that build on top of the 49% GMV growth Farfetch posted in 2020, it's also a quick upgrade to initial guidance provided just three months ago when founder and CEO Jose Neves and the top team called for GMV growth of 30% to 35%. The new year is clearly off to a good start.

Underpinning the company's improved outlook was a solid showing in Q1. GMV was up 50% year over year, including a 60% jump in its Digital Platform GMV (in which it works with and/or manages luxury brands' online presence) to $790 million in the quarter. And Farfetch is reaching a more profitable scale as it expands. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), which turned positive in Q4 2020, also inched toward black as well. 

Metric

Q1 2021

Q1 2020

YoY Change

Gross merchandise value (GMV)

$916 million

$611 million

50%

Revenue

$485 million

$331 million

47%

Adjusted EBITDA (loss)

($22.3 million)

($19.2 million)

N/A

Adjusted EBITDA margin

(7.4%)

(4.7%)

N/A

Data source: Farfetch.  

High-end e-commerce for long-term value

Based on full-year estimates, Farfetch stock currently trades for six times expected 2021 sales. The bottom line is of lesser concern right now; Farfetch is in spend mode as it expands its luxury e-commerce ecosystem. But adjusted EBITDA is expected to finish out the year at a 1% to 2% margin -- nothing to write home about but nevertheless good progress for this fast-moving digital shopping platform.

That's why I bought more Farfetch stock. Besides looking like a long-term value, especially after shares have fallen nearly 50% from all-time highs during the recent tech stock sell-off, I love buying shares of companies as they start to turn the corner on profitability. A positive bottom line makes a company easier for investors to stick a value on, and profits often rise very quickly in the early days of a business reaching an efficient scale. Farfetch fits this bill as it's very early on in attaining economy of scale.

The continual pace of luxury brand additions to its digital commerce management suite -- especially in China where Farfetch only just recently launched its new site with Alibaba (BABA -1.22%) -- will make for some dramatic improvements in Farfetch's financials over the next few years. In fact, Neves said several thousand new brands became available to Alibaba shoppers via Farfetch when it opened in March. That influx of new users is sure to pay off for the company sooner rather than later.

This is no pandemic stock. Farfetch was a growth story before COVID-19, and its outlook for 2021 indicates it will continue its run even as the world gradually gets back to some semblance of normalcy. I remain bullish on this top e-commerce stock and took the opportunity to scoop up a few more shares right after the Q1 earnings update -- and will continue to do so if its rosy outlook for 2021 transpires.

Nicholas Rossolillo and his clients own shares of Alibaba Group Holding Ltd. and Farfetch Limited. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd. The Motley Fool recommends Farfetch Limited. The Motley Fool has a disclosure policy.

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