Farfetch Could Be the Best Consumer Cyclical Stock to Buy Now

I noticed that of the 229 consumer cyclical stocks with a market cap of $2 billion or more, Farfetch (FTCH) has the second-worst year-to-date performance through July 28, down almost 77%. Despite losing three-quarters of its value in 2022, Farfetch still possesses a market cap of $3 billion. 

So, there are only two conclusions one can make. Farfetch stock was incredibly overvalued entering 2022, or investors are missing something. 

I believe it’s the latter. Here’s why. 

Farfetch Is Financially Sound

You would think that the operator of one of the world’s largest luxury goods marketplaces was doing terribly, given the performance of its shares in 2022. You’d be wrong. 

Now, I’ll admit that it’s not lighting it up, but it’s still pushing the ball in the right direction. Its gross merchandise value (GMV) in the first quarter was $930.8 million, 1.7% higher than in Q1 2021. Its revenue was $514.8 million, 6.1% higher than a year ago. 

Further, its digital platform GMV over the past two years increased by 64%. Excluding fulfillment revenue from its digital platform, revenues increased 6.6% to $435.9 million. The company finished the first quarter with 3.82 million active consumers on its digital platform, 16.8% higher than a year ago, with an average order value (AOV) of $632, $14 higher than last year. 

Of course, investors are focusing on the fact that it generated an operating loss of $160.9 million, 35.9% higher than Q1 2021. Losses are frowned upon in a big way in the current market environment. There’s nothing that Farfetch can do about this. It’s out of its control.

However, as it said at the end of May, it expects its digital platform GMV to increase 5-10% in 2022 with a positive adjusted EBITDA. At the end of December, Farfetch had net cash of $733 million, or $0.24 a share. 

It’s got plenty to keep the lights on and the business growing.

Farfetch Is Undervalued

Miller Value Partners, the hedge fund founded by veteran value investor Bill Miller, recently discussed Farfetch in its analysis of the first half of 2022. The hedge fund believes that “high potential, early-stage growth companies like Farfetch have gotten slaughtered in 2022. It believes Farfetch could be a massive long-term winner. 

“FTCH has also acquired several traditional luxury goods companies over the years, the largest being New Guards Group (NGG), a collection of brands. It also owns Stadium Goods, a stake in Neiman Marcus Group, Browns and several other assets,” stated Miller portfolio manager Samantha McLemore on July 15.  

“Many of these businesses are already profitable. We calculate their value alone to be worth more than the entire company today! At the current price, you get a free option on the whole marketplace and platform services business.”

McLemore mentioned that Farfetch invested $200 million in the Neiman Marcus Group in April. In addition to its investment, the company will be re-platforming Nieman’s Bergdorf Goodman website and mobile app using its Farfetch Platform Technology. Both Nieman and Bergdorft will also join its Farfetch Marketplace, adding even more cachet than already exists in the luxury digital space. 

So, in the opinion of Miller Value, FTCH stock is worth $16 or more.

Farfetch Has Other Big Investors Behind It

As of the end of March, UK-based portfolio manager Baillie Gifford was Farfetch’s third-largest shareholder with 34.8 million shares, good for 10.3% of the company. During the first quarter, it added 4.2 million shares. 

Another big buyer in the first quarter was the San Francisco hedge fund Dragoneer Investment Group. It acquired 10.6 million shares during the quarter at an estimated $15.12. Regarding shares acquired during the quarter, Farfetch was its largest purchase. It held no shares at the end of 2021.    

Other big buyers in the first quarter included Eminence Capital, Morgan Stanley, and D.E. Shaw. 

Another portfolio manager to buy into Farfetch in the first quarter of the year was Polen Capital. It added some for its U.S. Small Company Growth Fund. 

“Our research shows that its brand assortment, brand image, geographic breadth, an inventory-light business model, a more compelling offering for luxury partners, and artificial intelligence are all competitive edges for the company,” Polen’s Q1 2022 shareholder letter stated. 

“We believe Farfetch is well-positioned for the continued market share shift from offline to online in this category.”

As Polen says, Farfetch is the only independent player in the online luxury market. As consumers get more comfortable shopping for luxury items online, Farfetch will continue to be the destination most choose. 

The Bottom Line About FTCH

Farfetch is presently hampered by the fact that it’s both a retailer -- online and offline -- and a technology company. That makes it tough to value at the best of times. However, as some of the investors I’ve referenced have said, it’s got a dominant position in online luxury retail. 

Ultimately, the cream rises to the top. Time and scale will raise Farfetch’s valuation. Patient investors will be rewarded. It could be the best consumer cyclical to buy now for growth and value. 

• Stocks Rally on Speculation the Pace of Fed Rate Hikes May Slow
• Meta Platforms Reports its First-Ever Sales Decline - Shares Plunge
• Stocks Slide on Recession Concerns
• Stocks Slightly Lower as U.S. Q2 GDP Unexpectedly Falls