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Is Farfetch Stock Ready for a Massive 2023 Rally?

By Nicholas Rossolillo,

2023-03-14

It's been a painful two years for Farfetch (NYSE: FTCH) shareholders. In 2021, the luxury goods e-commerce company was a high-flying do-no-wrong stock, and many investors were trying to ride Farfetch to the moon. Today, few want anything to do with it. Farfetch is beginning to look more like a distressed asset than it is a potential value stock in the making. Shares are presently some 94% off all-time highs.

Besides a general souring on high-growth-no-profit companies, Farfetch had a number of issues crop up in 2022 -- some of them its own making, but others due to macroeconomic pressure outside of its control. Some of those pressures are beginning to ease. Is Farfetch stock ready for a big rally in 2023?

The digital economy moderates, and business in China and Russia evaporates

Besides Farfetch's stock getting slammed by the U.S. Federal Reserve's aggressive interest rate hikes in 2022 ( higher rates lower the value of stocks ), Farfetch's business itself was also blasted by a moderation in digital economic activity last year. In-person shopping made a big comeback, helping lots of other luxury goods companies with a more square focus on a brick-and-mortar experience.

Farfetch does have its own physical store presence, as well as digital tools to help high-end product makers and retailers attract an audience. But besides a return to in-person shopping habits, Farfetch also took a deep hit from two big markets for luxury items: Russia and China. Following the invasion of Ukraine, many brands (and eventually Farfetch) closed down operations in Russia.

And then there was China, the world's most populous country -- and thus the largest market in the world for luxury sales. Ongoing COVID-19 lockdowns were hobbling the economy. And when the government ended its "zero-COVID" policy late in 2022, there were severe outbreaks that further restricted activity.

Add in a record run-up in the U.S. dollar, a side effect of the Fed's interest rate hikes that lowers the value of international sales... well, you get the idea. It was an ugly out-of-fashion year for Farfetch. The company's gross merchandise value (or GMV, the value of products sold by it and its customers using the Farfetch platform) fell 4% in 2022 to $4.06 billion. Resulting full-year revenue increased just 2.7% to $2.32 billion.

Farfetch needs to clean up its own mess, too

We can't simply blame all of Farfetch's woes on external factors, though. After multiple acquisitions and rampant spending -- especially during the early pandemic boomtime -- Farfetch is an unprofitable enterprise. Adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) was negative $98.7 million last year, down from positive $1.6 million in 2021.

A lot of non-cash expenses (like amortization of intangible assets such as acquisitions made in years past) helped drive down this profit metric. But so did $245 million in employee stock-based compensation in 2022. In other words, Farfetch has itself in a bit of a financial mess, which was poor timing given the multiple macroeconomic factors that struck at the same time. Farfetch has been taking action by trying to get its operations more fit, and downsizing its workforce.

Adjusted EBITDA margin is expected to swing to positive 1% to 3% in 2023, and adjusted EBITDA margin of 10% to 13% by 2025.

Time for a big reversal?

Interestingly enough, just as Farfetch is beginning to take profitability (that is to say, financial sustainability) more seriously, some of those macroeconomic problems could be starting to clear. The Fed's pace of interest rate hikes appears to be slowing (though that could change seemingly on a whim, or a one-off month of "surprise" inflation). China is also reopening and could be finding its footing once more.

Farfetch predicts its 2023 GMV will be $4.9 billion, up about 20%. Resulting revenue should thus return to growth too, which means that meager adjusted EBITDA margin outlook could equate to some robust cash generation. Management is also still targeting $10 billion in GMV by 2025 to coincide with its 10% to 13% adjusted EBITDA margin.

Granted, I'm not completely satisfied with Farfetch's efforts to date. There are a lot of warts (and not too many beauty marks) with this business. But I thought shares were cheap enough to warrant a nibble six months ago . The stock (and valuation, given the 2023 outlook) is even cheaper now. I'm still nibbling a bit. File Farfetch away in the very high-risk -- and only potentially high-reward -- file.

Nicholas Rossolillo and his clients have positions in Farfetch. The Motley Fool has positions in and recommends Farfetch. The Motley Fool has a disclosure policy .

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