All shopping is moving online — including luxury fashion — and that’s why luxury fashion e-retailer Farfetch (NYSE:FTCH) has been one of Wall Street’s favorite stocks over the past year. During that stretch, Farfetch’s stock price has risen more than 500%.
But things aren’t going so well for Farfetch stock today.
The company reported fourth-quarter numbers Thursday, after the bell. Those numbers were good and topped estimates.
But the company’s growth momentum meaningfully slowed from the third quarter, and management is guiding for this slowdown to carry into 2021.
Investors who have been bidding up FTCH stock for over a year now, weren’t too impressed. Farfetch stock dropped more than 10%.
Some consolidation here while investors process this slowdown as well as broader interest rate headwinds. Then a return to the stock’s long-term uptrend.
So, if time is on your side, you should consider buying this dip in Farfetch stock.
FTCH Stock: A Long-Term Winner
Farfetch is a great company, with tons of long-term growth potential, that every growth investor should seek exposure to for the next few years.
Here’s the story.
Luxury fashion is a very big market ($300 billion in 2019) that is supported by steady demand drivers (it has consistently grown by 5% per year over the past decade). But sales have remained stubbornly stuck in the physical channel, for various reasons, so that in 2019, only 12% of luxury fashion sales were transacted online — versus 30%-plus for the broader apparel category.
This all changed in 2020. Luxury fashion stores closed. Consumers shifted online. They’ve liked what they found. And the luxury e-retail market is now positioned for a decade of hypergrowth ahead as the luxury fashion market plays “catch up” with the rest of the apparel market and runs to 30%-plus online penetration rates.
Farfetch is the Amazon of this space. The company operates an e-commerce website and app with unrivaled reach (3 million active consumers globally), unrivaled inventory (1,300+ luxury sellers), and unrivaled technology (the app is very high-quality).
These features constitute durable competitive advantages.
The company’s best-in-class technology and widest inventory will attract more buyers to the platform, while its huge buyer base will attract more inventory, which will lead to more buyers. It’s the same virtuous growth cycle Amazon leveraged to dominate e-commerce — and which Farfetch will leverage to dominate luxury e-retail.
Long-term, a very large portion of the $300 billion worth of luxury goods bought every year will be purchased through Farfetch.
The company’s GMV in 2020 was just $3.2 billion. Thus, the runway for growth here is very long — and so is the runway for further gains in FTCH stock.
Slowing, But Still on the Right Track
Investors are being skittish with FTCH stock right now because the company’s growth momentum is slowing.
That’s true. Gross merchandise value, revenue, and profit growth rates all slowed in Q4 relative to Q3. This slowdown is expected to persist into 2021.
But, more importantly, everything is still trending in the right direction and at an excellent pace.
Customers in Q4 rose 46%. GMV rose 43%. Revenues rose 41%. Adjusted EBITDA margins expanded 750 basis points into positive territory.
Those are good numbers.
Good enough that they broadly underscore that the long-term bull thesis on Farfetch stock remains intact. This company is still rapidly turning into the Amazon of luxury fashion at a time when the luxury fashion market is pivoting online.
The only question is: How much does this slowdown coupled with higher rates impact the valuation on FTCH stock?
Valuation Remains Tangible
The quarter didn’t really force me to revise my long-term model on Farfetch all that much. I’ve slightly revised my estimates lower to account for slightly slower growth — and that’s about it.
To that extent, I still broadly see Farfetch as a 20%-plus revenue grower over the next decade with room to expand EBITDA margins to north of 20%.
Under those assumptions, I see Farfetch doing about $5.50 in earnings per share by 2030. Based on a 25X forward earnings multiple and a 10% annual discount rate, that implies a 2021 price target for FTCH stock of $64.
Bottom Line on FTCH Stock
Everything still looks great at Farfetch. Investors are just processing slower growth and higher rates. As they do, FTCH stock will likely remain range bound in the lower $50s.
Prolonged weakness there will turn into a buying opportunity. Eventually, rates will stop rising, investors will buy the dip, and FTCH stock will trend back above $60.
Long-term, I still love FTCH stock.
But it’s not my favorite growth stock to buy today.
Instead, the best growth stock to buy today is a company that reminds me of a young Amazon. Indeed, I think buying this stock today could be like buying AMZN stock back in 1997 — before it soared thousands of percent.
Which stock am I talking about?
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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