Shares of luxury online marketplace Farfetch surges 53 percent in IPO's first day of trading

Key Points
  • Shares of London-based luxury online marketplace Farfetch jumped more than 50 percent in their market debut Friday.
  • Farfetch Thursday night raised $885, stamping a valuation of $6.2 billion on the online giant, taking into account employee dilution.
  • The global market for personal luxury goods was estimated to be worth $307 billion in 2017.
Farfetch CEO on IPO and luxury online marketplace
Farfetch CEO on IPO and luxury online marketplace

Shares of London-based luxury online marketplace Farfetch surged as much as 53 percent in their market debut Friday as investors placed their bet on the company's technology and unique niche in high-end luxury.

Farfetch sold 44.2 million shares Thursday night, raising $885 million and stamping a valuation of roughly $6.2 billion on the online giant after factoring in shares already held by employees. It priced its initial public offering a buck above its range of $17 to $19 a share, after having already upsized its IPO due to robust demand.

Farfetch opened at $27 and posted an intraday high of $30.60.

With a $6.2 billion market price and $385 million in 2017 revenue, Farfetch is trading at a richer valuation than Amazon, JD.com as well as other traditional retailers.

"Marketplace" companies often trade at a higher premium than traditional retailers, because they don't carry the risk being stuck with unwanted product, investment bankers say. Farfetch, however, continues to face steep competition from luxury retailers like Matchesfashion.com and Net-a-Porter. While its marketplace business model alleviates its inventory risk, it does not stop customers from shopping on multiple websites, the bankers say.

Farfetch began as platform to help local high-end boutiques reach broader audiences and later evolved as a tool through which brands like Gucci could sell directly. It connects shoppers to over 700 brands and boutiques internationally and express ships to more than 190 countries, according to the company's registration documents.

It was founded in 2008 by José Neves, a Portugese entrepreneur with experience in both luxury and technology, according to the company. Neves spent years courting the world's most elite brands, in an industry ruled by a narrow set of power players, like Chanel, Richement and Hermes. Of the retailers Farfetch works with, 98 percent of have an exclusive relationship with it.

Those tight relations with luxury players stands in contrast to those they have with Amazon. Luxury labels have resisted selling on Amazon, suspicious of its ability to maintain the integrity of their brand.

The global market for personal luxury goods was estimated to be worth $307 billion in 2017, according to the Farfetch's registration documents, citing data compiled by Bain. It is expected to reach $446 billion by 2025, according to the data.

Farfetch makes its money primarily through commissions on sales on its website, generating revenue of $385 million in fiscal 2017, a 59 percent jump over the previous year.

It continues, though, to lose money, as it goes after new customers and builds out its infrastructure. Farfetch recorded an after-tax loss of $112 million in 2017, down from a loss of $81 million the previous year.

Despite plans to continue to invest, Farfetch's customers to have proven to be loyal, a rarity in e-commerce.

"Typically over time, customers peter out. Here, it's almost like in this business, after they get customers they become something of an annuity. It's more like what you would see in a software or service firm than a luxury apparel company," said Daniel McCarthy at Theta Equity, a quantitative financial analysis firm.

Still, for Farfetch to ultimately achieve profitability, said McCarthy, it will need to sufficiently grow its sales to balance its fixed costs like administration expenses. Farfetch is also taking a number of risks, including its investments in new technology to support its "store of the future." Meantime, the luxury market, albeit growing, has limited runway and remains vulnerable to economic dips.

Farfetch has grown through a number of partnerships, including JD.com in Asia and the Chalhoub Group in the Middle East, that have helped it broaden its distribution, offerings and capabilities. It has offices in 11 cities, including London, Tokyo and Los Angeles.

It also continues to invest in brick-and-mortar retail, buying London fashion boutique Browns in 2015. It is using Browns as one of its testing grounds for new technology in what it calls the "store of the future." Offerings include touch-screen-enhanced mirrors and connected clothing racks.

Farfetch also launched Black and White, an infrastructure platform that luxury brands can use to develop their own e-commerce business.