While it might not be a household name when it comes to online retail, luxury fashion e-retailer Farfetch (NYSE:FTCH) has nonetheless been a huge beneficiary of Covid-19 tailwinds as consumers across the globe, under widespread stay-at-home orders, migrated to online shopping channels. In fact, FTCH stock is up more than 50% year-to-date.
Source: nikkimeel / Shutterstock.com
Zooming out, Farfetch’s 50% rally in 2020 is simply the beginning of a much bigger, much longer rally in the stock, which could ultimately see the stock soar several hundred percent over the next five to ten years. Here’s the bull thesis.
In a nutshell, Farfetch could become the Amazon (NASDAQ:AMZN) of the global luxury fashion retail world.
If Farfetch successfully executes against this opportunity, this could be a $20 billion company one day — even a $40 billion company in an “everything goes right” scenario.
Farfetch has a market cap of $5 billion today.
Needless to say, FTCH stock is — at the very least — worth your attention today.
The Amazon of Luxury Fashion
Farfetch has created a leading e-commerce marketplace of full-price, authentic luxury fashion products. Think Gucci sneakers, Prada tote bags and the like.
The company has a unique and visible opportunity to turn that leading marketplace — which has grown its gross merchandise value (GMV) by nearly 500% since 2015 — into the Amazon of the luxury fashion retail world over the next five to ten years.
That’s a big deal.
The luxury fashion retail world is quite big, with more than $300 billion in sales last year. It’s supported by steady demand, as sales have risen at a 5% compounded annual growth rate since 2008. And it’s in desperate need of consolidation and digitization, because the industry has no centralized platform for customers to purchase multiple high-end brands and limited e-retail penetration at just 12%, compared to 30%+ for the broader apparel category.
In other words, luxury fashion is a big, growing industry due for a digital makeover. Farfetch — as the number one global in-season luxury fashion online marketplace, with 1,200+ luxury sellers and more than 2.1 million active consumers — is best positioned to deliver that makeover.
Ultimately, that means Farfetch has an opportunity to turn into the centralized, global digital marketplace for the $300+ billion luxury fashion market within the next decade, a position which will command a huge market cap at scale.
Farfetch Stock to $100?
My base case scenario for Farfetch calls for FTCH stock to hit $60 within the next decade, implying 4X returns. But my bull case scenario calls for FTCH stock to soar to $120, implying 8X return potential.
The numbers here are pretty simple.
Top-down, the global market for luxury fashion will sustain 5% annualized growth on its way to $500+ billion in sales by 2030. E-retail penetration rates in that market will continue to expand, from about 12% today, to likely somewhere around 30% by 2030 (where the broader apparel category’s e-retail penetration rate sits today).
Farfetch owns about 5% of the global luxury fashion e-retail market today, 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. Assuming that combination drives pre-tax profit margins towards 15% by 2030, then Farfetch could be looking at around $3 in earnings per share 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.
My bull case simply adjusts e-retail penetration in the luxury fashion vertical up from 30% to 50%. It largely maintains all other assumptions. In that model, $6 in earnings per share is doable by 2030. The same math produces a $120 price target for FTCH stock.
Either way, there’s tons of upside left in this online retail stock.
Bottom Line on FTCH Stock
Farfetch stock is up 50% year-to-date. Yet this is just the top of the first inning of this company’s growth narrative.
Over the next decade, a few things will happen. The global luxury fashion market will continue to grow. Sales in that market will increasingly pivot online. And Farfetch will likely become the go-to centralized digital marketplace for luxury fashion.
The company’s sales will sustain huge growth. Profit margins will materially improve. And, by the end of the decade, we will all be calling Farfetch the Amazon of luxury fashion.
Against that backdrop, FTCH stock will rally, a lot. By somewhere between 300% and 700%, or more.
So, if time is on your side, FTCH stock is worth putting into your buy-and-hold portfolio.
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.
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