Farfetch (FTCH -10.99%) is a specialized player in luxury fashion online retail that's seen its valuation crushed as business performance has worsened and investors have moved away from risky growth stocks. The company's share price has fallen roughly 69% over the last year and trades down approximately 94% from the lifetime high that it hit in February 2021.
Does the beaten-down e-commerce stock have what it takes to deliver a big rebound that rewards shareholders, or is it still too risky to be considered in the bargain bin? Read on for competing bullish and bearish takes from two Motley Fool contributors.
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More than cyclical problems
Jeremy Bowman: Farfetch has been all over the map since its 2018 IPO. The luxury e-commerce platform struggled in its initial years as the company put up wide losses, but the stock then spiked during the pandemic as it benefited from e-commerce demand and strong performance in China, the world's biggest luxury market.
However, as the economy has reopened, Farfetch's sales growth has stalled like much of the rest of the e-commerce sector, and it's continued to report wide losses. As a result, the stock has plunged and now trades at all-time lows.
On paper, Farfetch might sound like a good business as it combines a luxury fashion marketplace with over 1,400 sellers, with its own brands selling directly online. It also offers a white-glove service to fashion labels called Farfetch Platform Solutions, which runs e-commerce websites for luxury brands.
However, the business model has become overly complicated as the company is struggling after making several brand acquisitions to beef up its brand platform, or its first-party direct-selling business, which also includes some stores.
In its most recent quarter, revenue fell 5%, or rose 2% on a constant-currency basis, to $629 million, and gross merchandise value fell 12%, or 5% in constant currency, to $1.1 billion.
For the year, the company lost $98.7 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Farfetch also took $136.7 million in impairment charges in 2022, primarily relating to goodwill, a sign that it has overpaid for acquisitions.
You might think that Farfetch's problems would be shared by the broader luxury sector, but that isn't the case. LVMH, for example, posted record revenue and operating profits in 2022, both up 23% to 79.2 billion euros in revenue and 21.1 billion euros in operating profit.
That shows that Farfetch's challenges are its own, and it's still beholden to the brands it serves. While its low stock price might look like a buying opportunity, profitability still seems a long way away.
Room for big upside if the business emerges from headwinds
Keith Noonan: After previously expanding at a rapid pace, Farfetch's growth has admittedly fallen off a cliff. To some extent, the company's valuation has appropriately followed suit, but the market may have become too pessimistic about the fashion e-commerce specialist's ability to recover.
With the company valued at less than 65% of this year's expected sales, Farfetch stock could deliver explosive performance if the company can get back to stronger sales growth and make progress with improving its margins.
FTCH P/S Ratio (Forward) data by YCharts.
Farfetch is already a fairly established player in the luxury e-commerce space, generating more than $4 billion in GMV in 2022. While gross merchandise volume (GMV) declined roughly 11.6% in the fourth quarter, the company still posted GMV of roughly $1.14 billion in the period. Despite sales drop-off later in the year, annual revenue inched up roughly 3% to reach $2.3 billion in the period.
With Farfetch deriving a substantial portion of its sales from China, the company was negatively impacted by comparatively strict coronavirus pandemic lockdowns that extended through much of last year. The company also took a hit after it pulled out of doing business in Russia in response to the country's invasion of Ukraine. China has now relaxed its COVID policies, and the door is open for Farfetch to post much stronger performance in the territory.
The company anticipates that it will be able to reach GMV on its platforms exceeding $10 billion in 2025 and an EBITDA margin between 10% and 13% in the year. Whether it can make good on those targets remains to be seen, but Farfetch has feasible avenues to outperform the market's heavily bearish expectations and deliver wins for shareholders.
Should you buy Farfetch stock?
While Farfetch has a sizable sales base and an established position in luxury-fashion e-commerce, it's fair to say that the stock is a speculative investment. The company's sales performance last year was unimpressive, and the business has continued to post substantial losses. Investors who aren't willing to gamble on an uncertain outlook can probably safely pass on the stock.
With the online-retail specialist facing headwinds and having a questionable path to profitability, Farfetch stock is a contrarian play right now. On the other hand, the company looks cheaply valued by some metrics, and it could go on to post huge returns if the business regains momentum and shows that last year's results stemmed from a rare combination of unfavorable headwinds.
