Shares of Farfetch (NYSE: FTCH) have fallen off a cliff this year. As I write, they’re down to $0.75 (59p), which means an 84% decline this year. While it may be tempting to try and unearth value among the wreckage, I wouldn’t touch this penny stock. Here’s why.
A slowing growth stock
Farfetch is a luxury goods platform that connects online shoppers to over a thousand boutiques and fashion labels. It also powers e-commerce operations for UK department store Harrods and Italian fashion house Ferragamo, among others. And it owns some retailers and brands outright, including Browns.
If we zoom out a little further than this year, the Farfetch share price is actually down 99% since February 2021.
What’s caused this shocking destruction of shareholder value? Well, for a start, this is a growth stock that has almost stopped growing while still posting losses.
In 2020 and 2021, it generated year-on-year revenue growth of 64% and 35%, respectively. However, last year revenue slowed to $2.3bn, which represented just 3% growth. And losses have continued to pile up.
In the stock market environment we’ve been in, that just wasn’t going to cut it with investors.
A slowing luxury market
Admittedly, most luxury goods companies have reported slowing sales in recent months. But the company’s marketplace average order value (AOV) was $561 in Q2, down 6% from last year.
That suggests to me that Farfetch’s product mix isn’t quite weighted enough towards the currently-more-resilient ultra-luxury shopper.
There has also been criticism that its acquisitions outside of its core marketplace operation are too much of a distraction.
A credit downgrade
On 28 November, the Telegraph reported that Farfetch founder and CEO José Neves was considering taking the company private. The next day the firm cancelled its scheduled earnings (Q3) announcement, warning that its prior financial guidance “should no longer be relied upon“.
When companies delay their earnings reports, it’s rarely for benign reasons. Worryingly, news outlets have reported that the firm may not have enough cash to survive much longer.
Looking at the numbers, that doesn’t surprise me. The company had $734m of cash and cash equivalents at the end of 2022. At the end of Q2 2023, that figure had dropped to $454m. But its GAAP (generally accepted accounting principles) net loss was around $500m during the first half of the year.
Additionally, Farfetch has $1.6bn in debt repayments due between 2027 and 2030. And last week, Moody’s downgraded the company’s credit rating to Caa2. That is deep junk territory, which just compounds the situation.
I’m staying away
I’m struggling to see too many investment cases, to be honest. But reports say the firm has been trying to secure emergency funding (as much as $500m) from private equity firms including Apollo Global Management.
If outside investment is found, then the stock could surge from here, especially as it’s trading at a lowly price-to-sales (P/S) ratio of 0.2. And there’s no denying that Farfetch is a popular online store.
However, a rescue deal is far from certain at this point. White knight(s) may never arrive. Therefore, I reckon this speculative penny stock looks more suited to day traders than long-term investors.
Needless to say, I think there are far safer shares in the market to invest my money in right now.
