There are several characteristics in a high-quality growth stock that investors should always look for before adding shares to their portfolio. These include things such as strong sales growth, justifiable valuations, and a large target market that is poised to grow for many years to come. One company that is aiming to become the leader in the online luxury fashion market fits the bill and could be worth keeping an eye on in the coming months.
Farfetch (NYSE:FTCH) is a company that provides a technology platform for the global fashion industry. The stock is trading near its all-time highs thanks to a recent announcement that Alibaba (NYSE:BABA) will invest millions in the company’s platform. We know that the rise of e-commerce is a trend that isn’t going anywhere, which is why this stock provides compelling possibilities. While it’s hard to deny that Farfetch is an interesting prospect in the growing online luxury market, is the stock a buy? Let’s take a deeper look below.
A Niche Market with Big Spenders
It’s safe to say that the e-commerce industry is a clear winner this year thanks to the pandemic accelerating the shift in consumer habits to shopping online. However, as of now, there isn’t really a well-known e-commerce platform that provides a variety of luxury products from different brands. This is a big reason why Farfetch is an attractive company for investors. Its platform offers the broadest range of luxury brands globally and caters to a niche market that spends big. The company recently reported that over 2.5 million active consumers use its platform and saw $1.9 billion in total merchandise volume in 2019.
According to Farfetch, its average customer’s household income is $120k and the company sees consistent annual spending of $1000+ from its customers. Since Farfetch targets an affluent niche market, cyclical risks like recessions won’t impact its sales as heavily. Another plus is the fact that the luxury fashion market is estimated to generate around $300 billion in annual sales. Farfetch has several competitive advantages that are working in its favor, including a strong brand name, a large network of sellers listing products on its platform, and partnerships with some of the best designer brands in the world.
Partnership with Alibaba & Richemont
With the demand for luxury brands in China stronger than ever, it makes a lot of sense that Farfetch would partner up with Alibaba to launch more shopping channels on its numerous e-commerce websites. The strategic partnership will help Farfetch reach more than 757 million consumers on Alibaba’s popular platforms and could be a massive growth catalyst for the company going forward. The Chinese luxury market is expected to account for half of all global luxury sales by the year 2025, which means Farfetch could see robust sales growth as a result of the partnership.
According to the company’s press release, Alibaba will invest $300 million in Farfetch by purchasing private convertible notes. Additionally, Richemont, a Swiss-based luxury goods holding company, will also be investing $300 million in Farfetch. It’s also worth mentioning that both Alibaba and Richemont will invest $250 million each to form Farfetch China, a joint venture that will include Farfetch’s marketplace operations in the China region. The partnership announcement has caused the stock to rally to new all-time highs and is clearly a major step in the company’s journey towards becoming the leading luxury fashion e-commerce platform.
Strong Growth but Still Unprofitable
When we take a look at Farfetch’s recent Q2 earnings report, it’s clear that the company is benefitting from strong momentum this year. Q2 revenue increased by 74% year-over-year to $365 million while Digital Platform Gross Merchandise Volume reached an all-time high of $651 million. The company also reported a record number of new customers as Farfetch added over 500,000 new customers in Q2. These are all impressive numbers that confirm Farfetch is seeing exponential growth at this time, but there’s a caveat.
Investors need to be aware that Farfetch is an unprofitable company at this time. In Q2, Farfetch reported a loss after tax of $436 million, which was a bigger loss than the previous year. Like many high-growth companies, Farfetch will need to prove itself over time to truly gain investors’ trust. Farfetch’s Q3 earnings report that will be released after the market close on Nov. 12 will offer a good indication of whether or not the company can continue its strong momentum going forward.
Ready for its Close-Up?
There are a lot of positives to consider with Farfetch, the leading global platform for the luxury fashion industry. The recent strategic partnership announcement is a strong bullish catalyst for the stock and a statement of intent that Farfetch wants to capitalize on the growing demand for e-commerce in China. However, investors should be careful about adding shares after such a large move up. It’s probably best for investors that are interested in adding shares to wait until after the Q3 earnings release or until a decent-sized pullback before buying.