A little over a month ago, I called luxury fashion e-retailer Farfetch (NYSE:FTCH) one of the best under-the-radar online retail stocks to buy. That’s because the company was on the cusp of leveraging novel coronavirus tailwinds to turn into the Amazon of the global luxury fashion retail market.
Since then, FTCH stock has rallied about 50%.
That’s a big rally in a short time. I wouldn’t blame you for profit-taking here.
But, believe it or not, Farfetch stock still has a lot of upside left both over the next few months, and over the next few years. Here’s why.
The Amazon of Luxury Fashion
The bull thesis behind FTCH stock is simple. Relatively obscure Farfetch will turn into the Amazon of the global luxury fashion market during the 2020s.
The global luxury fashion market is quite big – about $300 billion in annual sales. And it’s supported by steady demand drivers, with sales rising at a 5% compounded annual growth rate since 2008.
Importantly, this market is under-penetrated in e-commerce (just 12% e-retail penetration, versus 30%-plus for the broader apparel category). It is also highly fragmented. There are several designer brands, but no go-to, consolidated marketplace for buying all these designer brands in one spot.
Thus, luxury fashion is a big, growing industry due for a digital makeover. Covid-19 inspired the beginnings of this digital makeover. Rising consumer demand for industry digitization and consolidation will sustain this makeover over the next several years.
Farfetch is best positioned as it consolidates and digitizes over the next decade. The company is the top global in-season luxury fashion online marketplace, with 1,200-plus luxury sellers and more than 2.1 million active consumers.
Net net, by the end of the decade, Farfetch will go from what it is today (a $7 billion nascent e-retail company) to the Amazon of a $300 billion industry.
Significant Long-Term Potential
The number supports significant long-term upside potential for FTCH stock in the event this company turns into the Amazon of luxury fashion.
Top-down, the global market for luxury fashion will sustain 5% annualized growth on its way to $500-plus billion in sales by 2030. E-retail penetration rates will continue to expand from about 12% today to around 30% by 2030. (The broader apparel category’s e-retail penetration rate is about 30% today.)
Farfetch owns about 5% of the global luxury fashion e-retail market, up from about 2% in 2016. The biggest e-commerce players in the world own about 10% of the market. Reasonably speaking, Farfetch should be able to replicate that success in the luxury fashion vertical, implying 10% global market share within the decade.
If so, my modeling suggests that $8 billion plus in sales is possible by 2030, up from about $900 million in 2019.
Concurrently, gross margins should improve with strong demand, while opex rates should fall with scale.
Under all those assumptions, my modeling suggests that $3 is a doable earnings per share target for Farfetch by 2030. Based on a 20-times forward earnings multiple – which is historically average for consumer discretionary stocks – that equates to a $60 price target for FTCH stock.
That’s about triple today’s price tag.
FTCH Stock Sees Strong Near-Term Catalysts
If you discount that 2029 price target of $60 back by 8.5% per year, you arrive at a 2020 price target for FTCH stock of almost $30.
Thus, I think FTCH stock can rally another near 50% over the next ~6 months. What will drive shares to $30? Three things.
One, sustained strong e-commerce adoption on the back of persistent Covid-19 disruptions to the physical shopping experience. This dynamic should bring on a slew of new customers and first-time buyers to the Farfetch platform. Consumers that used to go to the Gucci store to buy a bag are now forced to download the Farfetch app.
Two, increasing consumer demand for luxury fashion products as the global economy recovers from its lows. And, consumers will look to reallocate spending from trips to products. We’ve already seen this sharp uptick in places where the virus is largely “under control”, like Europe and Asia. This dynamic should increase how much each customer on the Farfetch platform spends.
Three, concurrent strong user and spend per user growth will drive huge revenue growth. The growth will allow the platform to benefit from economies of scale and drive meaningful profit margin expansion. Farfetch may report a few profitable quarters in 2020.
In sum, these three strong catalysts should help FTCH stock glide to $30 by the end of the year.
Bottom Line on FTCH Stock
Farfetch stock is a long-term winner. Importantly, it’s one of the few long-term winners in this market that’s still undervalued relative to the company’s long-term profit growth prospects.
As such, I say stick with the rally in FTCH stock. There’s still a long ways to go before this rally runs out of juice.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long AMZN.