Farfetch Stock: Undervalued E-Commerce Stock Has 390% Upside

Farfetch Ltd Continues to Report Strong Financials

Farfetch Ltd (NYSE:FTCH) is a luxury e-commerce stock that was one of the biggest winners during the COVID-19 pandemic. In 2020, FTCH stock rallied by an impressive 495%. That momentum was interrupted in early 2021 on concerns that the Federal Reserve would eventually start raising interest rates.

Interest rate hikes were still more than a year away, but those fears sent growth stocks considerably lower. Since peaking in February 2021, Farfetch stock has lost 88% of its value.

During an economic downturn, you might expect an e-commerce company like Farfetch to experience some financial losses. After all, due to pandemic-related lockdowns, many people around the world lost their jobs and the economy tipped into a recession.

But the fact is, as a luxury online shopping destination for affluent shoppers, Farfetch’s financials weren’t exactly negatively affected by the pandemic.

In 2020, the company’s gross merchandise value (GMV) went up by 49% year-over-year, exceeding $3.0 billion. The company’s 2020 revenue increased by 64% year-over-year to $1.7 billion. (Source: “Farfetch Announces Fourth Quarter and Full Year 2020 Results,” Farfetch Ltd, February 25, 2022.)

In the fourth quarter of 2020, Farfetch Ltd posted its first quarter of positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA): $10.0 million.

For 2021, Farfetch reported record GMV of $4.2 billion, a 33% increase over its 2020 GMV and a 98% increase over its 2019 GMV. (Source: “Farfetch Announces Fourth Quarter and Full Year 2021 Results,” Farfetch Ltd, February 24, 2022.)

The company’s 2021 revenue increased by 35% year-over-year to $2.3 billion. Its 2021 adjusted EBITDA improved to $1.6 million from a 2020 adjusted EBITDA loss of $47.4 million.

For the fourth quarter of 2021, the company reported adjusted EBITDA of $36.1 million.

For investors who worried that Farfetch’s amazing financial results were somehow a fluke, the company proved them wrong with solid first-quarter 2022 results and a strong outlook.

Despite Farfetch Ltd’s excellent financial results in 2021 and the first quarter of 2022, FTCH stock has been in serious decline. As of this writing, Farfetch stock is down by:

  • 20% over the last month
  • 56% over the last three months
  • 81% over the last six months
  • 74% year-to-date
  • 79% year-over-year

The hit to FTCH stock has more to do with what’s been happening in the broader stock market—and investors’ concerns about rising interest rates and inflation—than with what’s been going on at Farfetch Ltd.

During the first 24 months of the pandemic, the wealth of billionaires increased faster than in the previous 23 years combined. For companies like Farfetch, it means there’s a growing number of potential customers. (Source: “Profiting From Pain,” OXFAM, May 23, 2022.)

This hasn’t been lost on Wall Street. Of the analysts providing a 12-month price target for FTCH stock, their average estimate is $25.20 and their high estimate is $36.00. This points to potential gains in the range of 176% to 395%.

Chart courtesy of StockCharts.com

About FTCH Stock

Farfetch is the world’s top online luxury platform. It’s a destination where 3.7 million well-heeled shoppers around the world buy products from more than 1,400 luxury sellers, including “Prada,” “Dsquared2,” and “Burberry.” (Source: “About,” Farfetch Ltd, last accessed June 1, 2022.)

In addition to its e-commerce site, the company has an app for retailers and brands.

Farfetch Ltd also offers in-store experiences in cities like Dubai, Hong Kong, London, Los Angeles, New York, Tokyo, and Shanghai. The company operates brick-and-mortar stores under the “Browns,” “Stadium Goods,” “Off-White,” “Ambush,” and “Palm Angels” brands.

In April, the company announced a global partnership with Neiman Marcus Group, a luxury American retailer and the parent of brands including “Neiman Marcus” and “Bergdorf Goodman.” (Source: “FARFETCH and Neiman Marcus Group Announce Global Strategic Partnership and Investment, Including Expanding Bergdorf Goodman’s E-Commerce Capabilities and Reach,” Farfetch Ltd, April 5, 2022.)

As part of the agreement, Farfetch took a minority position in Neiman Marcus Group with a $200.0 million common equity investment. Through this agreement, Neiman Marcus Group will use “FARFETCH Platform Solutions” (FPS) to re-platform the Bergdorf Goodman web site and app.

Both Bergdorf Goodman and Neiman Marcus will join the “FARFETCH Marketplace.”

Great Q1 Results

For the first quarter ended March 31, 2022, Farfetch announced that its revenue increased by 6.1% year-over-year to $514.8 million. (Source: “Farfetch Announces First Quarter 2022 Results,” Farfetch Ltd, May 26, 2022.)

The gains were primarily driven by a 9.3% increase in digital platform revenue to $395.6 million and a 74.8% growth in in-store revenue, offset by a 10.5% decrease in brand platform revenue to $100.5 million.

The company’s GMV climbed by 1.7% to $930.8 million in the first quarter of 2022, while its digital platform GMV went up by 2.5% to $809.5 million.

Farfetch Ltd’s profit after tax in the first quarter of 2022 came in at $728.8 million, up by 41% over the $516.6 million in the first quarter of 2021. The company reported first-quarter 2022 basic earnings of $1.93 per share, a 34% increase over the first-quarter 2021 earnings of $1.44 per share.

On a diluted basis, Farfetch Ltd reported a loss of $0.37 per share for the first quarter of 2022, compared to $0.28 in the first quarter of 2021.

As of March 31, 2022, the company’s cash and cash equivalents were $938.0 million.

Elliot Jordan, the company’s CFO, commented, “I am pleased that the first quarter 2022 results of Farfetch demonstrate our underlying strength and ability to adapt to the changing macro environment whilst building on the momentum we have achieved over recent years.” (Source: Ibid.)

“In light of the current environment we will be tailoring our resource allocation with an eye towards leveraging the platform model advantage we have to increase market share, while also positioning ourselves to expand our profitability to deliver shareholder value.”

For fiscal 2022, Farfetch expects to report digital platform GMV growth of five percent to 10% and brand platform GMV growth of 10% to 15%.

Analyst Take

As the operator of the leading online luxury retail platform, Farfetch Ltd continues to do well financially in spite of unprecedented economic challenges, including soaring inflation, macroeconomic events in China, and the company ceasing its operations in Russia.

While those factors have negatively affected the company’s performance and outlook, Farfetch Ltd has experienced significant sales growth from the Americas and the Middle East. This has allowed management to report continued healthy financial results, including high revenue growth.

Judging by the company’s strong guidance, that momentum is expected to continue throughout 2022, which should lead Farfetch stock to rise in value.