In this episode of Industry Focus: Consumer Goods, host Emily Flippen is joined by Motley Fool analyst Yasser El-Shimy as he makes his Industry Focus debut to talk about one of the largest and most successful e-retailers of luxury goods: Farfetch (NYSE:FTCH).
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This video was recorded on March 2, 2021.
Emily Flippen: Welcome to Industry Focus. Today is Tuesday, March 2, and I am your host, Emily Flippen. Today, I am joined by Motley Fool analyst Yasser El-Shimy, as we talk about one of the hottest fashion stocks on the market today, Farfetch. Yasser, thanks so much for joining. I think this is your first time on Industry Focus, is that right?
Yasser El-Shimy: That is right, Emily, and honestly, it feels a bit so realize it’s been a long time fan of yours and of the show itself. I still remember a few years ago just walking my dog down the street, listening to David Gardner grill you over Etsy‘s market cap. I remember at that time, I had an epiphany of I really want to do this. I love this. So, here I am now, and I’m very much looking forward to it.
Flippen: It’s funny you mentioned that, because for anybody who is listening who doesn’t know about the Rule Breaker Investing podcast from David Gardner, the Motley Fool’s co-founder, one of his regular segments is what he calls the Market Cap Game Show, where he puts a few analysts on and essentially ask them quiz over the market caps of various companies. I have been on it a number of times, and also embarrassed myself a number of times. In particular, I think the worst one was guessing the market cap of Americo. It was a company I had never heard of before. David gave me a hint and said they own U-Haul, so they’re the U-Haulers. I think I guessed a market cap of something like $50 billion for Americo. I guess I really overestimated how many people needed u-hauls, because that’s dramatically off. So a little bit of a spoiler there. But if you’re not a listener of that podcast, I’d definitely encourage all of our listeners on Industry Focus to also tune in for that. But I’ve gone off on a tangent here. Before we get into Farfetch, Yasser, I’m sure a lot of our listeners will want to hear about your story. You went from podcast listener and now you’re a full-fledged analyst. But there’s a lot of stuff that happened in between there. So, tell us about yourself a little bit.
El-Shimy: Sure. I’d be happy to. I’m born and raised in Cairo, Egypt. Actually, that’s where I went to school. I learned English in college. I went to the American University in Cairo there, and then I moved to the U.S. around 2007 or so to do a Ph.D. in political science. Only after I have been in the U.S. for a year or two did I actually start getting interested in the whole investing world. If you know anything about Egyptian investing in general, stock markets are almost seen as casinos, like you’re supposed to avoid them like a plague. So I really went out on a limb here, where I think, you know what? There might be value actually in doing this. I started doing it on the side for a little bit. Initially, I started with mutual funds, then ETFs and then I was like, you know what? Where’s the fun in that? I want to pick my own stocks. So, I started educating myself and just bit by bit, growing in confidence, and here I am. It basically took me a few years to realize that this is my real passion and I kind of quit my other career that had been going on at that point, both in policy and academia, and I wanted to dedicate myself full time to finding great innovative companies with long runways ahead of them. That’s what I love to do.
Flippen: Well, it’s truly amazing and I will say it as it takes guts. It’s easy for someone my age. I studied finance, it was like OK, that’s what I’ll naturally do. I mean, you had an entire career and background, and I think a lot of our listeners view investing as a hobby, something they do on the side and it takes guts to move into it as your full time career. I can speak personally from working with you. I think that’s been a good decision at least thus far, and I know we talked about looking at innovative and interesting companies. The company we’re talking about today definitely fits with both of those boxes. In fact, you have your own, we’ll talk about it at the end of the show, but you have your own checklist for businesses that you like to invest in. This one scores up pretty well on the Shimy checklist here. So let’s just dive right into it.
This is a business that correlates to a business we’ve talked about before on Industry Focus. Back in December, Asit and I did a show on Revolve Group which is a smaller competitor of sorts you could say to Farfetch. But Farfetch is not only the larger business, but also the relative outperformer. So Farfetch is up something like 500% over the past year, versus Revolve’s 180% gain. Neither of those are bad, let’s put that out there. Nothing to complain about if you own either businesses. It’s definitely more of a testament to the business of luxury e-commerce than anything. But it does mean, obviously, the conversation we’re going to have today will be really interesting. But putting that aside, assuming that our listeners are completely new to the industry, what can you tell us about Farfetch and its business?
El-Shimy: Well, let me put it this way. If Etsy and Shopify had a baby in a luxury boutique shop, it would be Farfetch. I hope this weird image will make a little more sense as we go through the conversation a little bit. But I think it’s very important to move beyond the immediate impression of Farfetch as just another e-retailer of luxury clothing. There’s a lot more to the company than that. So, Farfetch is the single largest marketplace for luxury retailers, boutiques and brands. They help sell their products either on the digital platform, so think, Etsy, for example, that’s the model where you have a marketplace with sellers and customers, or through e-concessions or virtual storefronts. So think, again, Shopify, how they enable small businesses to develop their own web commerce solutions. That’s what Farfetch also does for some of the world’s top brands. It is in fact the largest global online destination for luxury shopping, with three million active customers, 1,300-plus luxury sellers, including approximately all of the top 200 brands that exist around the world.
Eventually, the company has a vision to become the operating system and a digital enabler for the entire global luxury industry, both online and offline. So, the company is working on developing a suite of tech-powered back-end on front-end solutions to help retailers on brands from marketing to customer engagements and fulfillments and so on. Now, again, we were talking a lot about some of the third party stuff that they do, but they also have a first party retail business, through which they sell products through their brand store, as well as a company they acquired a couple of years ago called New Guards Group, which is a brand generation subsidiary of theirs that effectively acts as a new brand incubator and has been actually quite successful for them.
The last thing I’m going to say about their business model is that it generates impressive economics, both in terms of the take rate, which is about 30%, compared to Etsy at 17.5%, for example, or Shopify at 2.5%. So Farfetch is doing pretty well there. They have about 35% in order contribution margins. The best way to understand what order contribution margin means, it’s effectively customer acquisition cost divided by customer lifetime value. In other words, how valuable is this customer to you after you have spent money to acquire that customer? That order contribution margin, which is again, already impressive at 35%, increases to about 55% for mature cohorts. Average order value of about $600 per order. So, if you were able to retain these customers or should they have been able to, they keep paying you overtime and basically, their lifetime value increases exponentially almost. That is just one great aspect of the resident model that I love.
Flippen: I think a lot of frequent listeners will have had their minds blown by some of the numbers that you just mentioned. We spend a lot of time talking about these e-retailers, how much money they spend to acquire customers, but more importantly, how much money these customers spend on the platform and what their take rate is. I remember we recently did a show over Poshmark when they filed their S-1 to go public. Poshmark, I think, has an average order value of somewhere around $30, decent take rates, but nowhere near 30%. We’re talking about Farfetch being a luxury e-retailer, being on the higher end of that value chain, having an average order value of over $600 and a 30% take rate that increases as that person retains. So really, some crazy numbers there when you think about just how much revenue in cash Farfetch is able to pull in from their customers. That’s what we look for when we talk about consumer goods, but I know you’re working your way through the Analyst Development Program, which I believe you’re about to finish this week. Is that right?
El-Shimy: Well, my colleagues are about to finish this week, because I just had a newborn. I was allowed to have an extension a little bit. So, I’m taking a parental leave and I should be done by mid to late March.
Flippen: Oh, you should be taking way more time than you are. I completely forgot. Well, first of all, congratulations.
El-Shimy: Thank you.
Flippen: Now I’m feeling terrible that I even reached out to you to come on this podcast, knowing that you have a newborn at home now, so thank you for taking the time.
El-Shimy: This is a lot more fun than changing diapers, so you’re all good.
Flippen: I’d hope so. Well, one of the things that you’re always asked to look at whenever you go through analyst development programs, regardless of wherever you finish, is that the people who are behind the scenes running the show, it’s the Buck Hartzell methodology, understanding the management team. How do you feel about Farfetch’s management team? Do you think they’re additive?
El-Shimy: I love the Farfetch management team. I specifically love their CEO and Co-Founder, Jose Neves, because he’s effectively been a veteran of the fashion industry, and he’s also dabbled in tech before. So he combined both aspects of being on the cutting edge of fashion, as well as being very knowledgeable of some of the trends and technology, and was able to thread the needle, if you will, between the fashion industry, the tech world, and the small boutique owners to create Farfetch. He was able to have this radical revolutionary vision that this highly fragmented, highly archaic industry, just a few years back, I would say, was right for disruption, and that’s exactly what he did by building Farfetch. He created this entirely novel idea of what’s called distributed stock, where basically a particular item can be ordered, shipped, and delivered to a customer in another country or continent without Farfetch actually holding or owning too much of that centralized inventory.
He’s acting almost like a middleman with impressive take rates, without having that baggage of all the inventories that the usual wholesale retailers end up doing. Companies like Mytheresa or Yoox, Net-a-Porter or others. I also like the board of directors. They have some pretty high profile figures over there. They have Victor Luis who’s the former CEO of Tapestry, they have J. Michael Evans, the former President of Alibaba Group, and Gillian Tans, the former Chairwoman of Booking.com, just to name a few. So it’s a pretty well stacked management and board.
Flippen: No kidding, got some heavy hitters there.
Flippen: When you look at its business, you mentioned that they have this Etsy-like platform, but when you breakdown their revenue, what’s really driving growth? How does the business make money?
El-Shimy: Actually, the way they make money is divided across three different ways, three venues if you will. The first one is the digital platform solutions. That’s a marketplace we talked about, similar to Etsy. It constitutes about two third of adjusted revenue for the company. That’s by far their cash cow, if you will. That’s an area that they really generate a lot of resources too. Another part of the business is the brand platform or e-concessions, virtual storefronts, if you will. That’s similar to Shopify’s model of enabling small businesses to develop their own websites and e-commerce solutions. Farfetch effectively goes to either emerging brands or to established brands and tells them, “Hey, I can build your e-commerce presence in Saudi Arabia or in Egypt or in Vietnam at no cost to you.” So, you don’t have to invest any money and expect a return on invested capital for a certain amount and take that risk. Enabling that e-commerce ability for those brands has been very valuable to the brands, but also highly accretive to Farfetch itself.
Then finally, by far the smallest fragments of their revenue is the in-store purchases. They own a couple of venues here; they have the Browns store, and they also have pop-up stores for their offline brand, which is again, part of the New Guards Group subsidiary that we talked about earlier. I’m happy also to talk about their geographic breakdown of revenue, if you’d like, because that’s also impressive by itself. If you look at how it’s divided, basically, it’s almost evenly distributed across three segments: the Americas, Europe, Middle East, and Africa, Asia Pacific. Now, Europe, the Middle East, and Africa are the highest so far. America is the lowest. But one should expect the Americas to eventually catch up with that group once they dedicate a bit more resources. I’m relying here, by the way, on figures from 2019 because that’s the latest 20-F that they have actually produced. We’re waiting for their new one any day now. But the thing is, Asia Pacific has been almost on the same level as Europe, Middle East, and Africa, almost one third of revenue, and yet, China has actually been a really small part of that, which means that the opportunity there is still huge once they actually dedicate some resources toward developing better opportunity, which they are doing.
Flippen: It’s funny you mentioned China, because when you talk about the brand platform aspects, these aren’t sales that are happening directly, it’s not the 30% take rate, it’s the brand building out in foreign countries that they are doing for the brands that they own. It reminds me of a Chinese company that has been such a laggard in my portfolio. I would imagine that too many of our listeners are familiar with it. The company is Baozun. The ticker is BZUN. It was my first ever stock pitch here at The Fool. I did my undergrad in China, I was really excited by its prospects. It was an interesting business because, in addition to having the distribution business, which they’ve since spun out, they’ve actually focused on building out foreign brands in China. They would approach or be approached by brands like Nike or Lululemon who wanted to sell in China, wanted to have their own brand commerce, but didn’t have the resources or the strategy to build out in these foreign countries. The idea that a business could come in and offer a one-stop-shop for providing those solutions really attracted me to Baozun. It’s been a mismanaged business though, so it’s not fair for me to compare Farfetch to Baozun. In fact, Baozun has lost out, because they weren’t able to get those really premium and expensive brands that I would imagine are way more attractive to be on a Farfetch like platform, to have Farfetch as a partnership with.
So, it will be fun to watch them try to build that out in China. I believe in the business model, and I think that even without China, EMEA, the Europe, Middle East, Africa region, has been such an impressive foothold for them, that they probably don’t even need China to be successful, maybe to justify today’s valuation. But to be a successful business, they could probably fail in China and still be perfectly fine. But in particular, I’m really looking forward to seeing what happens with their expansion into China. But China aside, when you look at the luxury e-commerce industry, clearly more attractive than the industry that Baozun was going after, but when you look at that industry, what excites you? What attracts you to investing in the space?
El-Shimy: You’re asking exactly the right question, Emily. I’m excited about e-luxury, but not luxury itself. The luxury industry has historically been rife with inefficiencies, segmentation, big egos, brutal seasonality in shifts of taste. For example, I have never invested in any particularly luxury brands, mainly because tastes change over time, and what might be fashionable this year might not be next year, and sales are highly cyclical in that respect. What I like about e-luxury is that you don’t actually have to choose which style you’re going with for this year. You’re effectively capturing everything no matter what the brand and vogue is at this particular moment. Putting that aside, a rising share of spending on luxury products has started to move online. So, we’re starting to see a secular shift here of luxury shoppers who have traditionally opted to spend all their money in store, to actually start spending some money online. We have other trends also. They’re working in favor of e-luxury, including the fact that millions of people in China, India, and elsewhere are joining the ranks of upper-middle class or upper class, and they’re going to add to that cohort of luxury shoppers out there.
Additionally, millennials are increasingly developing a test for luxury these days, and they are more likely, obviously, to do much of their shopping online than some of the older generations. Now, all of these combined to create tailwinds from luxury e-commerce in general, and I believe Farfetch as the single biggest platform in that industry tends to benefit tremendously over time.
Flippen: I know the industry, because it is attractive for all the reasons that you just mentioned. It also is increasingly competitive. I mentioned we’ve talked about Revolver Group, but there are a number of other companies that I’m going to have trouble naming, Yoox, Net-a-Porter. These are businesses I can’t even imagine spending that much money [laughs] buying luxury goods online. But the point is, demand has clearly been there that a lot of competitors have entered into this space. What can you tell us about the competition and what sets potentially Farfetch apart?
El-Shimy: Sure. Well, Emily, if you were in the market for a $30,000 sheepskin coat, I can definitely direct you to Farfetch. [laughs].
Flippen: Dare to dream. [laughs]
El-Shimy: As much as I love the company, and it has been one of my favorite holdings in my portfolio, and also I pitched it as part of the investor development program, I have never made a purchase on Farfetch and for a reason. I’m not part of that cohort of people who are buying those kinds of high ticket items. However, when we talk about the competitive landscape for Farfetch, it’s important to keep in mind that it is the only scaled luxury marketplace. If we put it another way, there is no one else that’s actually competing with Farfetch on that scale. The competitors are likely to be one of three groups. The first one is online brand e-commerce, so prada.com or anybrand.com, basically, if you’re buying directly from that brand. The other competitor would be the omni-channel multi-brand wholesalers, think Saks Fifth Avenue, for example, either in store or their website. Finally, online multi-brand retailers like Yoox, Net-a-Porter or MyTheresa.
Now, these competitors effectively have no scale either globally or technologically to offer all the things Farfetch offers both its customers and brand and retailer partners. Farfetch, for example, operates in around 200 countries around the world and can ship and do logistics, and all of that in 200 countries around the world. None of these companies can do that. Additionally, the amount of products that are available on Farfetch and the diversity of brands is just unmatched. Nothing comes close. I believe it’s something like 12 times the number of brands that are available on Yoox, Net-a-Porter, which is its second biggest competitor in that space. Let me add one more thing. 80% of items listed on the platform are exclusive to Farfetch. Now, that doesn’t mean that they are not selling anywhere else, but it means that the only online marketplace that they are selling is on Farfetch, as well as the brand website itself. If you want to find the highest diversity of items, Farfetch is definitely going to be your bet.
Flippen: It might be worth pointing out, I know this is a question that a lot of listeners may be asking themselves because at least on Industry Focus, we spent a lot of time covering resellers, the issue of fake goods. Is it really a concern for Farfetch the way that it can be with some of their other competitors that are focused on resale because these are direct from the brands? You’re talking about the actual producers themselves partnering with Farfetch, listing their products. You’re not talking about people, the way that you were, say, Poshmark, where somebody buys an expensive suit or whatever from a brand and then looks to resell it. Worth clarifying to our listeners that, as you’re thinking about Farfetch’s business, and you think about luxury goods in general having the issue with fake goods, a little bit less of a concern for a business like Farfetch, because they do go direct to source. Again, helps prop up that $600 average order value as a price point.
Before we move on here, I do want to get to your special checklist. That’s my favorite part of what we have planned for today’s episode. I think everybody should have a special checklist. I don’t have one yet, but I think everybody should. What do you think about Farfetch’s competitive advantage? I know that you like a lot of different things about the business, but boiling down what makes Farfetch special, what stands out to you?
El-Shimy: Sure. I mean, if we have all day, I’ll go on, but I’m going to try and be quick here and just speed through some of the aspects I think make Farfetch stand out from the competition. The first competitive advantage on my mind is the fact that Farfetch has been an aggregator of a fragmented industry. They have the highest collection of brands, including most of the top 200 global brands, and as well as the highest product selection within these brands than any other e-commerce platform. Secondly, Farfetch does enjoy a pretty strong brand image that some of its competitors like wholesalers use clothes stores like the RealReal, or the Everything Store, that’s Amazon, which is now trying to get into luxury, are going to struggle with. Luxury shoppers are very much brand focused, and when you buy a luxury item it’s often a function of emotion. So, you don’t want to be going to Amazon to do that, that’s not really what it’s for. Farfetch plays that card very, very well compared to others.
Third competitive advantage in my mind is their business model, which is inventory light. The company is rarely stuck with unsold inventory, and can quickly and nimbly offer the latest fashion items, both through their own label and through the brand’s store front or e-concessions. 52% of their gross merchandise volume is third party, just to keep that in context, unlike retailers and wholesalers, who effectively own the entire inventory and then have to sell it and often engage in highly competitive promotional behavior that presses down their margins, especially over time. Now, Farfetch also enjoys network effects. It has three million active customers and 1,300-plus luxury sellers. Basically, the sellers want to be where the customers are and that’s Farfetch, and the customers want to be with sellers and brands are, and that’s, again, Farfetch, so the network effects really work in their favor there.
Farfetch is also omnichannel. It gives the shoppers the option to either pick up in store or to have the item delivered to them at their home. The interesting part here is that Farfetch is actually able to glance through the data that their boutique and retail partners generate offline. When your Farfetch customer goes to pick up an item from these stores and decides to, I don’t know, maybe go for those extra pair of shoes that are on display there, Farfetch gets to know exactly what the customer ordered on the spot, and therefore is able to custom tailor their offering to that customer in the future based on their shopping preferences, both online and offline. That’s pretty special to me. Farfetch is also an end-to-end platform. Again, it’s not just a retailer or website. It actually helps brands and boutiques and retailers with everything from marketing to logistics, to back-office or back-end operations. It develops a whole solution that basically takes the pain for most of these partners out of the equation, and that’s something that no other company is offering them. Perhaps with maybe the exception of Shopify, but Shopify does not have a marketplace.
They also give brands control over pricing and visual appearance, which other competitors don’t. If you are a brand, if you are a top 10 brand, let’s say you’re a Moncler, or you’re a Gucci or Versace, or one of those top 10 brands, you want to make sure that your item, when it goes on sale on a third party platform, that it’s not discounted. Because once your items get discounted, that reflects negatively on the brand itself. By giving control over pricing to the brands themselves, that gives the brand that much control and gives Farfetch itself a competitive advantage over other retailers. I don’t know, I could go on and on. But one more thing I’m going to say here is that Farfetch is truly global. They have multilingual websites, they partner with local stores in whatever country, and over 90% of transactions on the platform are cross-border. That’s incredible. Recently, they’ve also been really — I mentioned China before; they’ve been really paying attention to the Chinese opportunity here. They have recently announced joint ventures with Alibaba and Richemont to basically launch on the Tmall luxury marketplace in China. That, again, remains to be a big opportunity for them and they stand to benefit tremendously. I’m happy to talk more about their active customer growth and all of these things if we have time, but I’ll stop here.
Flippen: There’s a lot to like, and I would encourage any of our listeners who maybe weren’t convinced, not that you could not be convinced by what you just said, but that aren’t convinced that Farfetch’s experience is differentiated, spend a little bit of time poking around on Farfetch’s website. Switch your location. If you have a VPN or something, switch your language up, and you can really get that sense about what a global business Farfetch is. They really are focused on the highest tiers, the most expensive products to the most luxury-demanding countries across the world, which, believe it or not, for our American listeners, it’s not the United States. So, if you’ve never heard of this business, if you’re comparing it in your mind to, say, The RealReal, to Poshmark, to Etsy, well, those are all great businesses, they’re all interesting in their own respects, none of them really paint out quite the holistic picture that Farfetch has created, just becoming that end-to-end platform for everything luxury.
El-Shimy: Emily, if I can jump in here, just since you brought up The RealReal, one thing that has often been said, well, Farfetch has just benefited from the fact that everybody has been under lockdown, people can’t go to their luxury stores, and that’s why you’re seeing sales increase. But the fact of the matter is, Farfetch has been increasing their active customers by 50% year over year, while rates of active customer growth are actually declining for other platforms like The RealReal. So there’s actually a tale of two cities here, and that speaks volumes about the attractiveness of the Farfetch platform compared to others, as well as the fact that we just might be on the precipice of them taking off in a secular direction.
Flippen: [laughs] Yeah. I’m laughing to myself because you say it so kindly, you compare it to The RealReal. Look, Farfetch is growing users, RealReal is losing users. They’re not just growing customers, their active customer growth is something like 50% year over year. That’s massive customer expansion, and that’s not purely as a result of the pandemic. This is a business that was growing pre-pandemic, so I love that comparison. You’re very diplomatic about the comparison there. The RealReal is a great company, but Farfetch, I think there’s just again, a level of differentiation that we’re seeing in the Farfetch platform that you don’t quite have with their competitors. But I really bury the lead here. I really want to get to your checklist. I know you have your own special formula, if we can call it that. You affectionately call it the Shimy checklist here about what you look for when building out your own personal portfolio. I know this is a company that you own individually in your portfolio. Tell us, what’s your checklist and how does Farfetch rank up?
El-Shimy: Well, let’s hope this checklist [laughs] becomes as famous as Jason Moser’s War on Cash basket. I told him he should receive royalties for that, by the way, but he never did. He’s too kind. My checklist is effectively a list of features I like to see in any business in which I plan to invest. The first of these is the vision; is that company’s vision radical? That’s a good thing if it is. For me, radical, disruptive, revolutionary, that’s good. But it also has to be credible. It has to be achievable, not some pie in the sky vision of making everyone around the world a happier person. That might be a good goal to have, but I don’t know how realistic it is. So for Farfetch becoming, as I said before, the operating system of the luxury industry around the world, that’s a radical vision to have, yet I believe it is possible, and so I’ll give them a pass on that.
The second item I check for is high and sustained revenue growth, and Farfetch easily passes that mark. It has had double-digit growth now to the tune of almost 60% year over year for full fiscal year 2020, and it shows no signs of slowing down necessarily very much. We were talking about Revolve earlier. Their sales declined by about 3%-4% year over year, whereas Farfetch has increased by 60%. Again, that’s a pretty good sign. The third item I like to check for is the rundle, or the recurring revenue bundle. Do they actually have a suite of products that they charge other companies to use? Now, Farfetch doesn’t quite have that yet, but I believe that they are potentially on their way to doing it in the future as they develop, as I said before, that suite of end-to-end services that they can offer to brands and to retailers.
The fourth item I check for is standout technology. Does the technology really stand out from competitors? Is there something special here? I would say they do have some standout technology, particularly in their AI and data analytics where they are able to target customers in a very granular level compared to other e-commerce plays in that sector, but again, it’s nothing completely unique or inimitable, so I don’t give them a complete pass on this. Then, I check for global footprint and scalability. Does the company operate globally? Or if it doesn’t, can it scale its sales and operations globally if it chooses to? Does the product or the service have global appeal? In this case, it passes the mark on both. It operates in almost 200 countries and has scaled quite massively over time. Network effects also I check for. If you are not familiar with network effects, it means that the more your platform grows, the better it gets, the more buyers you have, the more sellers you’re going to have, and the more sellers you have, the more buyers you’re going to have, and so there’s a virtual cycle there. I also check for the total addressable market. Does the company have a really sizable total addressable market ahead? Some of the more conservative estimates will put that TAM for Farfetch around $300 billion, but it could potentially rise to $350 billion per year.
Flippen: Man, that’s a lot of money spent on luxury goods. [laughs]
El-Shimy: That is a lot of money, and Farfetch is at less than 1% of that opportunity. No pun intended, their runway [laughs] is still quite long here. Finally, I check for high switching costs. In this case, maybe for customers, the switching costs are not particularly strong, because maybe it doesn’t cost you that much if you went directly to prada.com as opposed to Farfetch, but for suppliers and brands and retailers, the switching costs are quite high, because if you lose that channel, you’re effectively losing a massive audience all around the globe who could become potential customers, and you’re seeding that ground to competitors. That’s why you find even the most reluctant of the most exclusive brands, most recently Moncler, decided to go on the Farfetch platform, because they simply could not afford not to be on it. So from that perspective, for the brands, there are significant high switching costs here. Farfetch meets six out of those eight on my checklist, and my philosophy is I’ll invest in any company that passes five out of these eight, or at least I’ll consider [laughs] investing. Farfetch, I believe, has earned its place in my portfolio.
Flippen: Clearly one that you’re a big fan of. This last question feels a little silly to ask, but probably important because with every investment, even when it ranks a six out of eight on the Shimy checklist, there are things that can kill the investment thesis. So as we wrap up here, when you think about the risks that come with owning Farfetch, what one or two things really stand out to you as things that would be thesis breakers for your investment?
El-Shimy: Thesis breakers, I think probably the most dangerous development, if you will, that could happen to Farfetch is if China doesn’t pan out. Two days ago, they had a soft launch of the Farfetch platform on Tmall’s Luxury Pavilion. Now, again, the valuation is lofty at this point, and the stock has run up tremendously over the past few months in the year. So, if Farfetch cannot break into the Chinese markets, I think a lot of people are going to reconsider the valuation and potentially rerate the valuation of the company down. This is a threat to the stock, not so much to the business. The business will continue to be just fine, whether or not China succeeds. There’s also another question that weighs on my mind, which is, do luxury consumers really want to do the bulk of their shopping online? It used to be that if you’re going to spend a few thousand dollars on an item, you probably want to go into that luxury boutique or brand store, get the VIP treatment, be hidden from public view, be given a glass of champagne, and really pampered and just have that experience as you are placing that order. So, I think we really want to look out as to how well does Farfetch do post-pandemic, and if it’s able to maintain the customer engagement on the platform as it has been doing so far.
There are other risks to the business, including bigger competitors muscling in into the space. We’ve had Amazon now trying for at least over a year to break into the luxury fashion e-commerce market, to little success it seems, but that was honestly to be expected. The Amazon brand does not really translate into luxury shopping. I think it’s not as big a threat as some of the analysts have made it out to be at the time. Finally, I’ll say a word of caution here. This stalk has not been for the faint of heart. [laughs] If you are a fan of roller coasters, you are a fan of Farfetch stock. This stock was as low as $8 just October 2019 and was as high as $70-plus just a couple of weeks ago. It has been an immense volatile ride and I do not see a reason why it will stop being volatile, at least in the medium or short-term. So if you are in for this explosive growth and you can see that exponential opportunity ahead, you just have to buckle up for the ride.
Flippen: Nothing drives that point home more than seeing that Farfetch, the day that we’re taping this on March 2nd, is down something like 10% on virtually no news. This is the volatility that you get with a lot of these high fliers. So, I hope that does really drive that point home for our listeners. But Yasser, thank you so much for joining me today. Not only did you bring just a ton of research, but clearly a ton of knowledge about Farfetch. But you did it and I forgot you have a newborn at home. [laughs] I can’t thank you enough for taking your time out of your day, not only to come on the show, but to come on, answer our questions and prep. A lot of work went into this. This is my formal apology, but also formal thank you for joining.
El-Shimy: Well, thank you, Emily. It’s really my pleasure to be here and I love being with you.
Flippen: Listeners, that does it for this episode of Industry Focus. If you have any questions or just want to reach out, you can shoot us an email at firstname.lastname@example.org or tweet it to us, @MFIndustryFocus. As always, people on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don’t buy anything based solely on what you hear. Thanks to Tim Sparks for his work behind the screen today. For Yasser El-Shimy, I’m Emily Flippen. Thanks for listening and Fool on.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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