A look at the Farfetch valuation case

Peter Garnry

Head of Equity Strategy

Last month we wrote about Farfetch, the London-based technology platform for luxury fashion, as the company filed for IPO on NYSE. No information was released about the price range or the actual amount in the initial registration document. The initial F-1 filing stated that the proposed maximum aggregate offering price would be $100 million.

In the recent F-1 amendment, the offer size was increased to maximum $733.2m with a price range of $15-17 and expected pricing date is set to September 20, 2018, which means that expected first trading date is September 21. Farfetch’s business and outlook is described in our initial IPO analysis so please read that for background. Today’s update will only include sections on the offering and valuation.

The offering

Farfetch is raising $570.9m in new shares based on the mid-price and that the investment banks’ over-allotment option is exercised. Existing shareholders are also selling existing shares worth $119.2m. The shares will trade on New York Stock Exchange under the ticker symbol FTCH:xnys on SaxoTrader.
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Source: Farfetch, Saxo Bank
Based on 290,906,105 shares outstanding after the IPO (including options exercised) the market value at the mid-price is $4,654m. In addition, the company has issued several tranches of preferred shares with a book value of $742m as of June 30, 2018. The latest balance sheet shows that cash and short-term investments is $337m. Adding the $571m in proceeds from the IPO the company will have an immediate enterprise value of $4,489m after the IPO. 
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Source: Farfetch, Saxo Bank
Farfetch had 59% revenue growth in FY'17 slowing down to 55% H1 2018. The rapid growth is driven by massive expansion in operating expenses primarily used on administration and marketing. As a result, EBITDA has turned increasingly more negative although the EBITDA margin has improved somewhat (if an improvement of negative margins makes much sense).

Based on the H1 results we expect revenue to be up 53% in FY'18 taking revenue to $590.6m. Over the coming years we expect the revenue growth rate to slowly decay as the business matures and Farfetch slows down the growth in operating expenses to please investors with a more positive trajectory on operating profit (EBITDA).
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Source: Farfetch, Saxo Bank
Based on the estimated enterprise value and expected revenue in FY'18, the FY18e EV/Sales ratio is 7.6x. The FY'18e EV/EBITDA is not measurable or meaningful. 
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Source: Farfetch, Saxo Bank

Farfetch has not listed any direct competitors in the F-1 filing for direct peer comparison. However, based on our research their competitors are ASOS, Yoox Net-A-Porter Group (acquired by Richemont in June 2018) and Zalando. Their EV/Sales multiple (FY'18) is far below Farfetch’s:

● ASOS: 2.1x
● Yoox Net-A-Porter (latest, FY17): 1.9
● Zalando: 1.8x

It is clear from the valuation perspective that Farfetch is setting the valuation based on other technology platforms such as eBay, Etsy, Spotify, Netflix, Facebook, Twitter et cetera. It seems investor demand is high enough given the tight price range to accept this premise.

For Farfetch to live to those high expectations, the growth decay has be slow over the coming years with the business growing at least +40% on the top line each year to justify the valuation premium to ASOS, Yoox Net-A-Porter, and Zalando. Although the business model is not entirely the same, the question is whether it is so different to warrant such a big gap. Time will obviously tell and our view is that the first couple of earnings releases will be crucial for the stock price.

Risk profile

The Farfetch IPO comes with risks for investors. Key investment risks are slower online adoption/penetration than expected as luxury proves to be more a physical experience than online. The company is not profitable, which creates greater credit/equity risks for shareholders and creditors. The luxury fashion industry is highly competitive and fast-changing. which makes it difficult to predict. Farfetch is dependent on luxury sellers wanting to sell their goods on the platform and these sellers likely have the upper hand on the take-fees. GDPR could potentially slow down retail growth as it increases friction for customers.
 

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