The Tale of a Fallen Unicorn – On Farfetch’s Downfall

On February 19, 2022, Farfetch had just made a new all-time high, reaching $73.87 per share. The Earnings Report for the Full Year 2020 was set to be released the following week. 

The market was in a euphoric state. The Nasdaq Composite, the index comprising the more than 3000 stocks listed on the Nasdaq Stock Exchange, dominated by the technology sector, kept reaching consecutive all-time highs, and more than doubled from the pandemic lows. 

Interest rates were at extremely low levels. The 10Y Treasury yield, a very important measure of interest rates and risk appetite for the markets, was hovering at around 1.36%. At the same time, the Federal Reserve, the ECB, the BoJ2,, and other major central banks, were all conducting giant stimulus programs, with the Federal Reserve pumping, on its own, more than $120 Billion each month into credit markets. 

The world economy was also strong, recovering from the Covid-19 crisis, and showing promising signs of future growth. 

At this point, everything looked as good as it could be, a perfect, Goldilocks3, scenario. 

Companies like Farfetch were in the greatest market position they had ever been. The luxury industry was booming, as consumers accumulated savings during the lockdowns and mindsets changed – consumers were giving preference to experiences and luxury goods, rather than traditional expenses. 

Farfetch, however, had a history of unprofitability that forced them to raise capital frequently. In this scenario, with rates at the lowest levels seen in a long time, the company had the chance to issue long-term debt paying very small interest. 

Everything was perfect, right? It was, however, as good as it gets. 

The Federal Reserve soon announced the end of the stimulus programs and started to raise interest rates, with the other major central banks soon following. Risk appetite started to decrease, as the TINA4 regime came to an end. 

As rates increased, not only did Farfetch need to raise capital at higher rates, but consumers, who were once flush with cash, started to struggle and shifted their spending preferences. 

Farfetch’s business faced increased headwinds, at a time when investors were punishing unprofitable companies. Its shares kept declining, now at a more rapid pace, and recession fears, which would impact consumer sentiment and spending, sent Farfetch’s stock price even lower. 

The War in Ukraine also played a role in the company’s decline, as a further drop in consumer sentiment sent demand lower, especially for the products sold on Farfetch’s platforms. 

Once the darling of the luxury industry, attracting big investments from some of the most notable names on Wall Street, like George Soros, Farfetch’s shares opened at $4.88 in 2023’s first day of trading, down 93.4% from its peak. 

Today, it trades at $1.61, down another 67% from the start of the year, a total of 97.83% from the peak. 

Now valued at $610.8 Million, a number which is less than last year’s operating loss, Farfetch faces short-term issues related to solvency. Its long-term investments are now in danger, as the mere existence of a “long-term” for the company may be the stuff of dreams for its investors and executives. 

The future of the eternal Portuguese Unicorn is now at risk, and some news regarding drastic changes in the company’s structure will be a best-case scenario, as the time for easy money is clearly in the rear-view mirror. 

1Unicorn – company whose market value is greater than $1 Billion. 
2BoJ – Bank of Japan. 
3Goldilocks – a Goldilocks scenario relates to the concept of a Goldilocks Zone, in Astronomy, where the environment is ideal for the existence of life (in Finance, the environment is ideal for financial markets performance and economic growth)  
4TINA – Acronym for “There Is No Alternative”, pointing to the lack of investment alternatives away from stocks.