Analysts Stick by Farfetch Despite Stock Drop
The company was seen in a Catch-22, unable to please either the bulls or the bears with its outlook.
Investors turned bearish on Farfetch — pushing its shares down more than 35 percent over conservative guidance issued at its Capital Markets Day on Thursday — but many analysts remain fans even if the stock has a tough road ahead.
Farfetch shares bounced back up 8.5 percent to $5.99 on Friday as analysts acknowledged the company was in a tough spot as it tried to give Wall Street guidance on its future growth.
“Management was in a ‘Catch-22' situation,” said Ike Boruchow, an analyst at Wells Fargo. “Had they planned the business to more robust numbers, investors likely would have pushed back on the riskiness of the guide. Instead, they seem to have guided very realistic/ conservative numbers — and the market is poking holes at their inability to grow.”
In its first Capital Markets Day since going public in 2018 — several lifetimes ago given COVID-19 and the pace of change in both fashion and technology — Farfetch set course for gross merchandise volume of $10 billion by 2025 with a 10 percent margin in adjusted earnings before interest, taxes, depreciation and amortization.
But margins in the marketplace business, where Farfetch got its start, were set at about 5 percent, below the 20 percent margins seen in the platform services business and the brand unit, which includes the Off-White business, Palm Angels and others.
Clearly some investors were looking for more from both the marketplace and platform services and not so much reliance on the branded business.
“Taking a step back, we view this as management ‘ripping off the Band-Aid' and resetting growth expectations, while at the same time laying out a plan that leads to fairly compelling growth/profitability aspirations,” Boruchow said. “All in, we remain very bullish on the story, but acknowledge bulls are going to need duration… The stock is simply in a bad spot and any real inflection is at least 12 months away.”
Ashley Helgans, an analyst at Jefferies, said the big stock decline was “to a large degree based on misunderstanding” and that the guidance for 2025 could be viewed as “highly prudent.”
“Conservative assumptions include the macro remaining difficult and no new [Farfetch Platform Services] deals are signed, despite a strong pipeline,” Helgans noted. “With that said, we still believe in the long-term vision, but the road appears relatively long at this point and key drivers have yet to unfold, keeping sentiment challenged.”
Farfetch is still navigating a consumer market with many unknowns.
Lauren Schenk at Morgan Stanley said: “Big picture, the market and investors currently find it difficult to have visibility over the next six months let alone three years, especially for a business that has missed its financial results several times this year. Thus, we think the stock likely remains below a fair fundamental valuation until there is evidence Farfetch can deliver on its '23 targets, at which time the market may begin giving the stock credit for some of Farfetch's '25 goal posts.”
Even given the conservative guidance, Schenk said a sum of the parts valuation values Farfetch at $14 a share at least.
“We struggle to see further downside from here and thus remain overweight,” Schenk said.