Farfetch's (FTCH +0.00%) stock has surged nearly 40% since the company posted its first-quarter report on May 18. The London-based luxury e-tailer's revenue rose 8% year over year to $556 million and exceeded analysts' estimates by $41 million.
On an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis, Farfetch narrowed its loss from $36 million to $35 million, while its adjusted net loss of $0.16 per share cleared the consensus forecast by $0.13.
Image source: Getty Images.
Farfetch's growth rates might seem tepid, but they indicate its growth is accelerating again after enduring some tough challenges from inflation and China's COVID lockdowns in 2022. But is it too late to chase Farfetch's post-earnings rally?
Understanding Farfetch's business
Farfetch's online marketplace features nearly 1,300 luxury brands and connects sellers in over 50 countries to buyers in more than 190 countries. It also sells products through its first-party marketplace.
In addition, it owns the London-based retailer Browns, the New York-based sneaker and streetwear reseller Stadium Goods, and New Guards Group, a Milan-based luxury streetwear maker that owns Heron Preston, Off-White, and Palm Angels.
OTC: FTCH
Key Data Points
In 2022, Farfetch generated 61% of its revenue from its Digital Platform Services segment, which includes its commissions from third-party transactions and revenue from its first-party sales. It generated 14% of its revenue from its Digital Platform Fulfillment division, which makes most of its money from delivery fees.
Another 21% came from its Brand Platform division, which handles the wholesale distribution of New Guards' products to third-party retailers (while excluding the segment's direct-to-consumer sales). The remaining 4% of the company's revenue came from its brick-and-mortar stores. Here's how those four core businesses fared over the past four years.
|
Segment |
2019 |
2020 |
2021 |
2022 |
Q1 2023 |
|---|---|---|---|---|---|
|
Digital Platform Services Revenue Growth (YOY) |
43% |
47% |
34% |
2% |
8% |
|
Digital Platform Fulfillment Revenue Growth (YOY) |
31% |
67% |
56% |
(3%) |
2% |
|
Brand Platform Revenue Growth (YOY) |
N/A* |
138% |
20% |
2% |
14% |
|
In-Store Revenue Growth (YOY) |
77% |
36% |
89% |
38% |
10% |
|
Revenue Growth (YOY) |
70% |
64% |
35% |
3% |
8% |
Data source: Farfetch. YOY = Year-over-year. *This segment was launched after it acquired New Guards in 2019.
Are brighter days ahead for Farfetch?
As that table illustrates, Farfetch's growth slowed to a crawl in 2022 as inflation, the rising dollar, the Ukrainian War, and China's COVID lockdowns all disrupted its online sales of luxury goods.
Farfetch generated 22% and 11% of its revenue in the U.S. and U.K., respectively, in 2022. The remaining 67% of its revenue came from its "other countries," and its largest overseas market is most likely China. Farfetch operates its business in China as a three-way joint venture with the Chinese e-commerce leader Alibaba (BABA 1.83%) and the Swiss luxury goods giant Richemont (CFRH.F +0.81%), and it integrated its luxury marketplace into Alibaba's Tmall back in early 2021.
But in the first quarter of 2023, some of those headwinds dissipated as the U.S. market recovered and China ended its draconian zero-COVID lockdowns. In a statement, CEO José Neves said Farfetch's "sequential improvement in GMV (gross merchandise volume) growth in the U.S. and China, our two largest markets, as well as in orders across the Farfetch Marketplace, indicate the strength and resilience of our core business."
Farfetch expects its GMV to rise 21% in 2023, compared to a 4% drop in 2022. It didn't provide an exact outlook for its revenue, but analysts expect 20% growth. Based on that forecast, its stock looks dirt cheap at 0.8 times this year's sales.
But what about its margins?
Farfetch's revenue growth is finally accelerating again, but its annual adjusted EBITDA margins only turned positive once (at a slim 0.1% in 2021) over the past four years. However, it plans to generate a positive adjusted EBITDA margin of 1%-3% in 2023 -- compared to a negative margin of 4.9% in 2022 -- as its top-line growth accelerates, the currency headwinds wane, and it streamlines its spending.
Analysts expect Farfetch's adjusted EBITDA to come in at positive $32 million this year, more than quadruple to $148 million in 2024, and more than double to $338 million in 2025. Based on those rosy expectations -- which we should certainly take with a grain of salt -- Farfetch's adjusted EBITDA margin could potentially expand to 8% by 2025. They also suggest Farfetch is still a deep value stock at 14 times and six times its adjusted EBITDA estimates for 2024 and 2025, respectively.
So is it too late to buy Farfetch's stock?
Farfetch's stock experienced a big post-earnings pop, but it's still fundamentally cheap and remains more than 90% below its all-time high from Feb. 2021. The company seems to have carved out a defensible niche in the online market for selling higher-end and luxury goods across a wide range of markets, and its partnership with Alibaba makes it a promising play on China's post-COVID recovery. In other words, I don't think it's too late to buy this out-of-favor e-commerce stock.
