Back in June, I wrote that a relatively unknown e-commerce company by the name of Farfetch (NASDAQ:FTCH) was on its way to becoming the Amazon (NASDAQ:AMZN) of luxury fashion, and that along the way, Farfetch stock — which was sitting around $15 at the time — would soar to $120.
Less than six months later, FTCH stock is about halfway there.
Shares of the luxury e-commerce marketplace have soared 428% year-to-date to record highs just shy of $60. The big rally can be chalked up to Covid-19 providing an impetus for the largely antiquated luxury fashion market to finally follow in the footsteps of the rest of the apparel market and shift online.
Farfetch is at the forefront of this luxury fashion digitization trend. As such, the company is reporting 70%-plus revenue growth rates and the stock is surging.
The big surge is far from over.
For five big reasons, FTCH stock has more clarity and firepower today than ever before to surge to $120 over the next few years.
Here’s a deeper look.
Farfetch Stock: The Huge Luxury Fashion Market Is Digitizing (Finally)
The luxury fashion retail market is very big — clocking in at more than $300 billion in sales last year — and supported by steady demand drivers (sales have grown at a 5% compounded annual growth rate for several years).
This market has lagged the broader apparel market in terms of the digitization. E-retail penetration in luxury fashion retail was just 12% last year, versus 30%+ for the broader apparel category.
But Covid-19 has acted as an impetus for the luxury fashion retail market to finally shift online. This shift is permanent. Much like the broader apparel retail category, the luxury fashion market will eventually and inevitably be almost entirely digitized at scale because the in-store shopping experience offers very little tangible value over the online shopping experience in luxury goods.
To that end, the luxury fashion e-retail market is at an inflection point, wherein the market will go from ~12% penetration in 2019, to 30%-plus penetration by the end of the decade.
This rising tide will lift all boats in the market, FTCH stock included.
Gen Z Will Provide Big Demographic Tailwinds
At the same time that the luxury e-retail market is at a major inflection point, rising demographic tailwinds will promote turbo-charged growth across the entire luxury fashion industry.
That’s because young, Gen Z consumers love fancy things. From a recent Bank of America note: “Status symbols continue to matter for the next generation, with social media an ‘always on’ place to measure and compare social markers.”
Basically, in a social-media-dominated world, young consumers are hyper-obsessed with their image and appearance, and one way to boost image/appearance is through luxury items.
So Gen Z consumers buy a lot of luxury fashion items. And, these young consumers are just now coming into major purchasing power.
This favorable demographic change will help boost the entire luxury fashion market going forward. The impact will be especially large for the e-retail vertical, because these young consumers also like to shop online.
Net net, the rise of Gen Z consumers is a big plus for FTCH stock.
Marketplace Effects Will Keep Farfetch on Top
Today, Farfetch is the largest luxury fashion online marketplace in the world, with 1,200-plus luxury sellers and more than 2.5 million active consumers. This unparalleled size in the luxury e-fashion market gives Farfetch multiple enduring competitive advantages, including:
- Branding. Farfetch is the brand for online luxury fashion, with unrivaled mind-share and brand awareness. As such, if a consumer is looking to buy or sell a designer item online, chances are high they will do so through Farfetch.
- Network effects. As a marketplace, Farfetch benefits from network effects wherein more sellers leads to more products, which leads to more buyers, which leads to more demand, and in turn attracts more sellers. Lather. Rinse. Repeat. It’s a favorable growth flywheel.
- Distribution. Farfetch has partnerships with most of the world’s top designer brands. These brands are unlikely to flood their product everywhere because they want to preserve an ambience of exclusivity. Therefore, it’s unlikely that designer brands that are already partnered with Farfetch, execute many more partnerships with Farfetch competitors.
- Resources. As the biggest player in the space, Farfetch has the most resources to attack the luxury e-fashion opportunity. Case-in-point: Alibaba is investing $300 million into Farfetch, and not some Farfetch knock-off.
Zooming out, then, it’s clear to see that if anyone is going to turn into the Amazon of luxury fashion, it’s going to be Farfetch. If the company does that, then FTCH stock has significant long-term upside potential.
Alibaba Partnership Is a Big Win
Farfetch recently announced a big partnership with Chinese e-commerce juggernaut Alibaba (NYSE:BABA) wherein Alibaba is going to launch Farfetch luxury shopping channels on Tmall Luxury Pavilion and Luxury Soho.
This is a big win for Farfetch, because it gives the platform unparalleled exposure to Chinese consumers, who have a strong affinity for luxury products.
Last year, Chinese consumers accounted for 35% of global luxury spending.
By gaining more robust exposure to this all-important demographic, Farfetch has further boosted its visibility to turning into the de facto Amazon of luxury fashion.
Of course, that’s a great thing for FTCH stock.
Farfetch Stock Remains Undervalued
My long-term model on Farfetch calls for the FTCH stock price to hit $120 by the end of the decade.
The critical assumptions of that model include:
- Sustained ~5% compounded annual sales growth in the luxury retail market.
- E-retail penetration in luxury retail expands from 12% in 2019, to over 30% by 2030.
- Farfetch’s luxury e-retail market share expands from ~5% in 2019, to ~15% by 2030.
- Revenues soar above $10 billion by the late 2020s.
- Adjusted EBITDA margins scale to north of 20%.
- Earnings per share run to $6 by 2030.
A 20X multiple on $6 in earnings per share implies a long-term price target for FTCH stock of $120.
Bottom Line on FTCH Stock
Over the past year, three things have become clear as day:
- The luxury fashion retail market is ready to digitize.
- Farfetch is turning into the Amazon of luxury fashion. Three, Farfetch stock is and will remain one of the hottest stock in the market.
Combining those realities, the investment implication is also clear as day. Buy FTCH on weakness. Hold it for the long haul.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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