Farfetch (FTCH -1.02%) and Shopify (SHOP 0.23%) are two very different e-commerce companies. Farfetch, which is based in London, operates a third-party marketplace that sells nearly 1,300 luxury brands to buyers across the world. It also owns the London-based retailer Browns, the New York-based sneaker and streetwear reseller Stadium Goods, and the Milan-based luxury streetwear company New Guards Group.
Shopify, which is based in Ottawa, provides e-commerce services for independent merchants. It offers self-serve tools for creating e-commerce websites, processing payments, fulfilling orders, and managing marketing campaigns. That unified platform is an ideal one-stop shop for merchants who want to manage their own online businesses instead of joining a massive third-party marketplace like Amazon.
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Farfetch and Shopify both experienced strong growth throughout the pandemic as more people shopped online. However, both companies suffered slowdowns as pandemic issues eased and more brick-and-mortar stores reopened.
As a result, Farfetch's stock is trading down more than 60% over the past 12 months and Shopify's share prices dropped nearly 40%. Is either of these out-of-favor e-commerce stocks worth buying right now?
What happened to Farfetch?
Farfetch's revenue surged 64% in 2020, then jumped 35% in 2021 before cooling to a 3% uptick in 2022. Its growth slowed to a crawl due to inflation, tough currency headwinds, the Russia-Ukraine war's impact on its European sales, and the COVID-19 lockdowns in China -- which had been one of its core growth engines prior to the pandemic. Its business in China is operated as a joint venture with Alibaba and Richemont, which runs a flagship store on Alibaba's Tmall.
Farfetch's gross merchandise volume (GMV), or the value of all goods sold on its platform, declined by 4% in 2022. Its gross margin fell from 45% to 44.2% as it posted negative adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $98.7 million, which compared unfavorably to positive adjusted EBITDA of $1.6 million in 2021.
Those results were disappointing given that top-tier luxury brands like LVMH, Hermès, and Richemont all generated high double-digit sales growth in 2022. The low average order value (AOV) on its marketplace, which dropped 6% to $574 in 2022, also indicates that Farfetch serves "affordable luxury" customers who are more exposed to macro headwinds than the higher-end luxury consumers who buy pricier goods from LVMH or Hermès.
But despite all those challenges, Farfetch expects its GMV to increase 20% to $4.6 billion this year as its adjusted EBITDA growth comes in between 1% and 3%. It attributes that brighter outlook to easier comparisons against its troubles in Russia and China throughout 2022, the post-COVID recovery of the Chinese market, and tailwinds from new partnerships. However, the recent (or upcoming) departures of several of Farfetch's top executives -- including its chief brand officer, chief growth officer, and chief financial officer -- raise a few red flags regarding those rosy estimates.
What happened to Shopify?
Shopify's revenue soared 86% in 2020, grew another 57% in 2021, but only increased 21% in 2022. That slowdown was mainly caused by the e-commerce sector's post-pandemic slowdown and inflationary headwinds, which broadly curbed consumer spending on discretionary goods.
Its GMV increased 12% in 2022, but its gross margin declined from 53.8% to 49.2% because it generated a higher mix of its revenue from its lower-margin Shopify Payments and Deliverr logistics segments. That pressure will likely persist this year as Shopify continues to expand those services. Its adjusted net income plunged 94% to $47.6 million for the full year.
Shopify expects its revenue to rise by a "mid teens" percentage in the first quarter, while analysts forecast 19% revenue growth for the full year. But its adjusted earnings are projected to decline another 25%, even as it focuses on cutting costs. The company already laid off 10% of its workforce last year as it integrated its acquisition of Deliverr, but it doesn't plan to cut any more jobs this year. Instead, it plans to slow down its hiring as it carefully prioritizes its investments.
Shopify established an early-mover advantage in the self-serve e-commerce services market, but it now faces plenty of competition from similar services like Amazon's "Buy with Prime," BigCommerce, and Adobe Commerce. All of that competitive pressure could stifle Shopify's growth and pricing power.
On the bright side, Shopify is better diversified than Farfetch, isn't tethered to the fickle mid-range luxury market, and doesn't operate any brick-and-mortar stores. However, it also had to replace several of its top executives -- including its chief technology officer, chief legal officer, and chief talent officer -- after their abrupt departures over the past three years.
The valuations and verdict
Farfetch stock trades at less than 1 time this year's sales, while Shopify still trades at nearly 8 times this year's sales. Farfetch might seem like the cheaper play, but it deserves that discount because its growth has ground to a halt. It's painting a brighter picture for 2023, but I'd like to see more progress over the next few quarters before I buy its turnaround story. Shopify isn't cheap, but it's still the better buy because it generates more balanced growth.
