Farfetch’s $5-6 billion valuation: a closer look
Farfetch aims to float on the New York Stock Exchange by the end of the year, the London-based company said. The company’s banking consortium (led by Goldman Sachs and JP Morgan) are reportedly seeking a valuation of $5-6 billion. With 2017 revenues of “only” $386 million and most eCommerce companies valued at about 2x revenues, how will Farfetch’s bankers support this seemingly high valuation? This is the question many articles have raised.
Farfetch looks & feels like an eCommerce website but operates a marketplace model: an integrated solution for luxury brands providing marketing, supply chain capabilities, and fulfillment. The company carries no inventory risk. In return, Farfetch takes a percentage of sales of around 33% (their Take Rate) plus fulfilment service fees of around 8% on average.
If Farfetch is not an eCommerce business, can we see this actually reflected in Farfetch’s financials? And what does this mean for Farfetch’s valuation? We’ve analysed Farfetch’s financials by diving into its IPO prospectus (F-1 filing) and compared with both eCommerce players (Zalando, Yoox, Asos, Amazon and Stitchfix) and marketplaces (Booking, Just Eat, Delivery Hero, Deliveroo) to find the answer.
The difference between GMV and revenue
Farfetch reported 2017 revenues of $386 million (up 59% YoY) and this is the number people have (rightly) focused on. But as a marketplace, Farfetch records revenues very differently than eCommerce companies do, so the revenue multiples cannot be directly compared (eCommerce companies trade at around 2x revenues for 2018E).
Farfetch’s GMV (Gross Merchandise Value = total value of goods sold) is closer to what ecommerce peers like Zalando, Yoox and Asos call their revenue. Farfetch’s GMV is about 2.5x higher than its revenue: $910 million in 2017. Based on the reported H1 2018 figures, we estimate 2018E revenue to be $597 million (up 55% YoY) and 2018E GMV to be $1.4 billion (up 55% YoY).
For Zalando, Yoox and Asos their marketplace revenues are a far lower percentage of their total sales: Zalando about 10% of GMV (which implies only about 1% of total sales). Amazon’s marketplace business (“third-party seller services”) is about two-thirds of its GMV which implies about 25% of sales.
For Farfetch as much as 97% of its revenues are marketplace commissions (99% of GMV) charged to brands. In theory, this should result in much higher margins because the company does not incur the same cost of goods sold. Does it?
Farfetch is still at an early stage of development and its EBITDA margins are still negative 15% in 2017. So we have to look a bit higher in the income statement to see the difference.
Its gross margins are 38% in 2017 after all direct costs including marketing costs and after fulfilment. This is indeed substantially higher than eCommerce peers Yoox, Zalando, and Asos and even Amazon, as the above image shows. Farfetch’s management also likes to look at its gross margins excluding fulfilment revenues/costs (because it sees them as pass-through service cost for its partners). In that case the gross margins are even higher at 47%. This gets closer to typical marketplace gross margins of 50-70%.
However, general & administrative costs are over 70% of sales leading to the negative operating margin of 15%. The company could already reach profitability in 2019 (based on a highly simplistic extrapolation in 2019E, see bottom).
The “take-rate” charged to brands is around 33% of GMV, plus an additional 8% fulfilment service costs. By comparison, the take-rate for food delivery is around 15% (without delivery) to 30% (with delivery), while Booking.com’s take-rate is roughly 20-30%. Amazon’s take rate is around 10-15% depending on the category. The % take rate seems in line with that of companies like Deliveroo and Uber Eats which also provide full logistics services to their partners.
Brands seem to like the model. As of June 2018, the company had 989 luxury sellers on its marketplace, of which 614 were retailers and 375 were brands. Of these 614 retailers, 98% have entered into an exclusive relationship with Farfetch. In the last three years, the company retained all of its top 100 retailers, and all but one of its top 100 brands.
Growth profile and strengths
As the above benchmarking analysis shows, Farfetch’s growth profile is ahead of its peers. Online migration in the luxury segment is still catching up to other eCommerce segments. And the market opportunity is very big: the global market for personal luxury goods was estimated to be worth $307 billion in 2017 and is expected to reach $446 billion by 2025, according to Bain.
Farfetch is available to customers in over 190 countries. Exposure to emerging markets is strong. In China for example, the company “leverages JD.com’s local logistics network, consumer payment solutions, technology capabilities, and its marketing resources, including its WeChat partnership.”
As of June 2018, Farfetch had 1.1 million active customers (= at least one order in last twelve months). Over half are millennials, 66% are female, average age is 36 and an average annual income of $121,500. The average order size is $620.
While not quite as profitable (yet) as other online marketplaces like Booking, Just Eat and Takeaway (in the Netherlands), Farfetch has far better profitability potential than traditional eCommerce companies. Some more guidance from the company is required before the $5-6 billion valuation can be accepted (including more detailed cost breakdown and revenue guidance). No doubt investors will ask for this and much more information in the coming months. The company has given itself a lot of time until the end of the year. Adyen announced its intentions to go public around the same time in March and already completed its IPO in June. Who knows, perhaps a bidder will emerge in the meantime. JD.com?