Farfetch shares hit a low, are investors being too cautious?

Farfetch is approaching the first anniversary of its New York Stock Exchange debut with its valuation at a low and the share price continuing to plunge. The London headquartered firm’s shares dropped from a value of $22 on July 26 to fall yet again in early trading on August 26, dropping to $9.62 in the first half hour. They’d opened on September 21 last year at $28.45 and have only managed to edge above that price once this year.

The firm’s float last year had valued it at $5.8 billion but its current market capitalisation is closer to $2.85 billion.

The plunge of recent weeks came after the firm reported disappointing earnings in July with revenue surging but losses on the rise too and no sign of profits on the horizon.

There had also been negative publicity around Condé Nast exiting its almost $300 million stake in the online luxury marketplace with stories suggesting it had concerns over the high marketing spend at the firm.

And there have been reports that several law firms are looking at possible class action lawsuits against the company, on the grounds that it could have misled investors about its prospects. However, talk of such lawsuits is relatively common around companies that have seen a rapidly falling share price (especially one that launched its IPO on such a high) and many rarely actually happen.

Against such a background, it’s unsurprising that Farfetch spending $675 million in cash and shares to acquire New Guards Group or signing up to contribute to the development of Libra Blockchain failed to please shareholders.

But one thing has to be borne in mind and that’s the declared strategy of founder/CEO José Neves “to take the lion’s share of the $100bn growth expected in the online luxury industry.”

Spending heavily to achieve growth can be a risky strategy but Farfetch does seem to be achieving the sales expansion it’s aiming for. And its approach reminds us of another giant online business, Amazon, that was happy to sacrifice profits for years in order to grab market share, despite shareholder mutterings.

Its share price reflected this. The firm’s shares cost just $177 each in 2012 and were at $966 two years ago. But they were changing hands for over $1,757 early on Monday, giving it a market capitalisation of nearly $870 billion. Farfetch may never reach that sort of valuation, but its strategy could see a valuation explosion in years to come if it pays off.

Farfetch shares hit a low, are investors being too cautious?

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