Farfetch Ltd. (NYSE: FTCH) is an online luxury retail platform. The company was founded by José Manuel Ferreira Neves in 2007 and is headquartered in London, United Kingdom.
Farfetch Ltd's stock is trading at $14.3, as of 18 Mar 2022, and is down by 58% year-to-date (YTD). Over the past 12 months, the stock is down by 76%, whilst the S&P 500 is up by 13%, which means the stock has underperformed the broader market almost 90% over this period.
But what do the underlying trends at Farfetch Ltd tell us about its potential as a long-term investment?
Why are fundamental metrics important?
Over the long term, the price of a company's stock is usually tied to its fundamentals, and it therefore makes sense to start by looking at a company’s fundamentals when we are considering if it has the makings of a good long-term investment.
‘Fundamentals’ are a set of key metrics which can help you, as an investor, assess the financial health of the organization as well as its growth prospects.
There are a number of fundamental metrics to look at, but the ones we like to focus on are price to earnings ratio (P/E ratio), earnings per share (EPS), price to sales ratio (P/S ratio) and debt. When they are analyzed together, these metrics can start to 'paint the picture' and help you understand if a company is a solid investment.
With this in mind, let's take a look at Farfetch Ltd’s fundamentals and see if they can tell us anything about the company’s potential as an investment.
Farfetch Ltd's fundamentals
A good place to start is to look at the company's EPS, which tells us how profitable the company is on a 'per share' basis. This metric is calculated by taking a company's net income (after dividends on preferred stock) and dividing it by the number of outstanding shares.
Based on its most recent financial statements, Farfetch Ltd has EPS of 3.1, and year-on-year, this grew by 132%, which is encouraging.
Analyzing a company's price to earnings (P/E) ratio is also helpful to tell us how cheap or expensive a stock is, or how much of a premium investors are willing to pay for a company's earnings. It is calculated by taking the price of a stock and dividing this by the EPS. A higher ratio suggests that the stock is expensive in relation to its earnings, and a lower ratio indicates the opposite.
Based on its most recent financial statements, FTCH has a P/E ratio of 3.39. This is 85% lower than the average P/E ratio across an the industry benchmark, which is 22.9, indicating that the stock is quite inexpensive in relation to how much it earns.
Next, let's look at FTCH's P/S ratio, which looks at the company's stock price compared to its sales (revenues). It is calculated as the current price divided by sales for the previous 12 months, and is useful because it helps us understand how much investors are willing to pay for every dollar of a company's revenues. The consensus opinion is that those stocks with a lower P/S ratio offer better value, and those with a very low P/S ratio are known as 'value stocks', although what is considered a 'high' or 'low' P/S Ratio can vary across different sectors, so the best way to objectively assess it is to compare a company against its industry peers.
The company's P/S ratio is currently 2.86. Compared to the sector-wide average of 5.7, this is 39% lower, indicating that the stock may offer slightly more value compared to other companies in the same sector.
We also like to look at a company's price to book value (P/BV), which tells us how much investors are willing to pay for a company's assets. It is calculated by the company's stock price divided by its net assets (or 'book value', meaning the value of all assets which appear 'in its book'). P/BV is used by value investors to identify potential investments, and a P/BV of 1 is usually considered a solid investment.
Based on its most recent financial statements, Farfetch Ltd's P/BV is 58.66, which is 842% higher than the industry benchmark of 6.2. This is quite a bit higher than we’d expect to see.
Finally, it's always worth looking at a company's debt profile before deciding to invest in order to assess the risk. A high amount of debt can be a problem if a company is not generating enough cash flow to service its debt, and some sectors rely on debt more heavily than others.
As of 18 Mar 2022, Farfetch Ltd has total debt of $730M, which has fallen by 12% over the past year. The company also has cash & short-term investments totalling $1463M on-hand, giving it a 'net debt' of $-732.786M.
Farfetch Ltd's current levels of net debt don't worry us, and the company is not using debt to fund its operations, which is good to see.
The bottom line on Farfetch Ltd's stock
All in all, when we looked at the underlying trends at Farfetch Ltd, they didn't give us much confidence.
To be more specific, the stock is down by 58% YTD, down by 76% over the past year and the company’s P/BV is significantly higher than its industry benchmark. That's just not what we like to see.
Whilst we can't ignore the fact that is showing positive EPS growth y/y and has a more attractive P/S ratio compared to competitors, we don’t think FTCH is doing quite enough to deserve a spot in your portfolio right now. It may be worth adding to your watchlist to keep an eye on in the future.
Keep in mind that this analysis is general in nature. No single ratio or number will give you all of the information you need, and they must be weighed along with other considerations. Please conduct your own due diligence before deciding to invest.