Deep Dive: Farfetch
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What do they do? Farfetch is an online luxury platform. It operates a marketplace where buyers and sellers meet to exchange goods (very similar to other online marketplaces).
History? Jose Neves, the founder who is still the CEO, came up with the idea in 2007. The company is headquartered in London but operates on a fairly global scale.
Industry? The global luxury industry is $300 billion. It is estimated the Chinese luxury market will hit $100 billion in 2025, which is one of Farfetch’s largest markets.
Management? Founder, CEO, and chairman of the board is Jose Neves. He owns 12% of shares and has majority voting power. It is a one-man show at this company.
Valuation? (As of recording) P/S of 11.7, P/GP of 25.3. Not profitable.
Earnings? Full-year revenue up 64% to $1.7 billion, gross margin at 46.1%. Generated $116 million in operating cash flow but that was outweighed by $168 million in stock-based compensation.
Balance Sheet? $1.5 billion in cash, around $826 million in total debt (mostly convertible notes).
Potential Competitive Advantages? We had consumer trust, internet marketplace dynamics, and scale.
Future Growth Opportunities? Alibaba partnership, beauty, and continued growth from top sellers.
Highlights? Seems hard to copy, strong top-line growth, huge market opportunity.
Lowlights? Lots of red flags (we discuss on the show in detail), which were really the big lowlights. Also, management seems a bit dodgy talking about the convertible note derivatives.
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Disclosure: The authors and podcast guests are not financial advisors. Brett Schafer and Ryan Henderson are portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this podcast.