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As you’ll see this is a really interesting stock to take a look at.

London-based Farfetch wants to be the leading marketplace for luxury products.

Their website offers more than 1400 brands and takes around 30% of every sale made on the platform.

With an enterprise value just under 3.1 billion dollars, the stock looks cheap at 1.3 x revenue.

However, the company still isn’t profitable.

Earnings over the last 12 months was -327 million and free cash flow was -119 million.

The reason for that is the company is investing aggressively for growth. The company has made a number of acquisitions in recent years including a 48% stake in Net A Porter which was announced in May.

Despite those acquisitions, the balance sheet is clean with 576 million dollars of cash and almost the same in debt.

And revenue is growing. Sales grew 57% a year between 2017-2021 which is impressive.

But, second quarter growth slowed to 10.7% year on year and management’s outlook dropped to single digits for 2022. A big reason for that is supply chain disruption and lockdowns in China, which is a huge market for luxury brands.

Crucially, a lot of that weakness is now priced in. The stock has fallen -83% from its high and now trades below its 2018 IPO price. That’s despite the company almost tripling revenue since then.

Meanwhile, other marketplace businesses trade at much steeper valuations such as Etsy at 5 times revenue or Airbnb at 8 x revenues.

Those are not direct comparisons, but the luxury goods market is usually a resilient industry to be in.

So let’s assume the company can grow revenue at 15% per annum for the next 5 years then trade at 15 x ebitda on a 10% ebitda margin. That would give the company an enterprise value of roughly 6 billion dollars in 5 years time or an investment return of 18% per year.

And bear in mind that management is targeting ebitda margins closer to 30% long term, not 10%.

So if Farfetch can meet targets and become a legitimate part of the luxury ecosystem, the stock has solid upside from here.

There are risks of course. The company isn’t profitable and the business would suffer if brands decide to only sell via their own websites.

But a lot of negativity is priced in and the stock seems to be bottoming out. That’s why I own a position in Farfetch stock but please remember these are my personal opinions not financial advice.

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