What happened
Shares of Farfetch Limited (FTCH -2.06%) dipped 19.9% last month, according to data provided by S&P Global Market Intelligence. The online luxury fashion marketplace posted disappointing first-quarter earnings and said it is going to continue to be negatively impacted by the shutdown of Western businesses in Russia and COVID-19 lockdowns in China. Shares are down over 80% in the past 12 months.
So what
It is tough to pin down what investors were thinking with Farfetch stock last month. On May 24, shares were down as much as 40% even though there were no business updates from the company. Then, on May 26, Farfetch released its Q1 results, posting revenue of $515 million, which was way below analyst expectations of $560 million. Full-year guidance for gross merchandise volume (GMV, or the dollar amount of goods sold on its platform) was brought down to 5% to 10% year-over-year growth.
Image source: Getty Images.
On these bad results, Farfetch stock popped over 20%, bringing the stock down "only" 20% last month. At first glance, this seems like a strange price move since the results were so poor. However, it could be a classic case of overselling and investors being too pessimistic when they already knew the results were going to be bad.
Farfetch's business has a lot of exposure to the Russian and Chinese markets, which are big for the luxury fashion industry. Its Russian business was shut down in March due to the country's invasion of Ukraine, which investors knew would impact results. The China market, with the strict COVID-19 lockdowns, is seeing weakening demand and may be heading into a recession. This is not good for the demand for luxury fashion products, which Farfetch's management talked about. These developments were easily forecastable by investors over the past few months, which is why Farfetch's stock is down so much.
Now what
After last month's wild price moves, Farfetch now trades at a market cap of $3.2 billion. Over the past 12 months, the company has generated $2.28 billion in revenue and slightly over $1 billion in gross profit. This gives the stock a trailing price-to-sales ratio of 1.4 and price-to-gross profit of 3.2, both below the market average. This indicates that investors are very pessimistic about Farfetch's future, and if you believe the fashion platform can continue growing after it gets past these Russian and Chinese headwinds, the stock could be a good buy here.
