Chit Chat Stocks - Farfetch (FTCH) | Deep Dive

Episode Date: April 1, 2021

Farfetch is an online luxury fashion retail platform. Retailers can sell through Farfetch's platform where Farfetch will take a portion of the revenue. Farfetch also owns its own fashion apparel that can be found on the platform. Ian, Brett, and Ryan dive into what the company does and where Farfetch could grow from here. Enjoy the show! Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Follow Ian and check out his work on Twitter: https://twitter.com/IanGrayLive Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to our Youtube Channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Email us: [e-mail] Timestamps Company Background | (2:47) Industry | (6:33) Management & Ownership | (8:02) Valuation | (12:39) Earnings | (13:52) Balance Sheet | (17:52) Our Analysis | (19:56) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. Welcome in. This is the Thursday Deep Dive episode with Ian Gray. I'm here with Ryan. As always, you guys probably know that. But Ian, how are we doing today? How is it? Are

you back in Flagstaff? Are you down in Phoenix? Yeah, back in Flagstaff now. I was actually up in the market a little bit today. It was a down day, but just a weird mix of things was up for me. So I saw you're on with the guys at Cruising Altitude. That's exciting. You talked Mohawk. That reminded me of that. Yep. Yep. Talked Mohawk a little bit and they're doing some cool stuff over at Cruising Altitude. I think really talking about trying to reach Gen Z investors and get them kind of on the path that we always talk about, about long-term investing, focused on fundamentals, not just getting into day trading or anything like that. So it's cool to be able to talk about Gen Z investing and just that long-term mindset. Yeah, it's good when you

find people with long-term mindsets, but we got to get to the topic of the show. And actually, we got to mention our sponsor first, 7investing. Ryan, you want to talk about them because it's a big week when the show comes out. I believe their recommendations are going to go through unless they play an April Fool's show because it will be April 1st, I think. Yeah, I don't think they'll play an april fool's joke maybe they just release like seven terrible picks they're gonna release seven uh all seven are gonna recommend dogecoin no if you want your yeah if you want a short list there you go the april fool's prank whatever they have uh no use code ccm you get ten dollars off your first month uh yeah the release they will be released right so this is coming out

thursday so yes same day uh they just hired honor bond mahanti he is from australia and he is a phd in computer science with a giant investing background so i mean one they're adding another person that's an expert in international stuff and is a tech expert too it's kind of like yeah he sounded very smart yeah very smart and i think can at least help you know you know you're not just following them blindly you can help learn about these different industries help you with research. But today we're talking Farfetch to get off of that. And it is a fashion company, but it's a little more complex. So Ryan, why don't you introduce it? Yeah, I would say it's, yeah, I guess it's a fashion company, but they're online. Really,

they're an online luxury fashion platform. So there's several different parts to the business, but the portion that makes up the most of revenue is their Farfetch marketplace. And the way I think about this is it's kind of like an Etsy for luxury goods. They connect luxury brands, boutiques, department stores to consumers all over. I think it's 190 countries. Yeah, very global. Very global, yeah. But yeah, there's other components as well. As I mentioned, they categorize these operations into three different reporting segments. So they got the digital platform, brand platform, and in-store. The digital platform is any sales that are done online. So some of those are first-party sales,

where obviously they absorb all the volume on those. So the GMB, that all belongs to them. but then some of them are third-party sales where they basically just act as an intermediary and they take a 29% take rate, which is really high. So I guess maybe the margins must be really high on these luxury goods. And it's also a testament to how valuable the platform is to the sellers if they're willing to pay a 30% take rate. But it also includes Farfetch platform solutions, which is a white label enterprise offering for luxury brands. So the way I understand it is it's kind of like a shopify for luxury brands it gives them a full e-commerce solution and then they have brand platform but this is a very small component of revenue it's basically

the wholesale operations of uh the brand's new guard zones but it's any brand that farfetch owns where it's doing wholesale operations uh where they sell it to a luxury store and that luxury store marks it up whatever that's where they that's where they categorize it and then they have in-person or in-store sales. This is just physical store locations. So they've made several acquisitions. They have Browns, which is a fashion retailer, stadium goods, who if you've never shopped there, they offer premium sneakers. Apparently the average order amount at that sneaker store is north of $300. That's where I assume a lot of value investors have. Yeah, of course. And yeah, very frugal people probably go there. But then they have the New

guards portfolio which owns a bunch of different brands one of which is off-white um which i don't know if you ever heard of slack i've never heard of anything yeah you can tell i'm not we're we're not all fashionable here uh i don't think i've heard of any of these things have you i've heard of off-whites i've heard people be like yo check out those off-whites wow so you heard of these things yeah i've heard of off-whites but none of the other ones wow so i'm all right well i guess I'm the one that is totally out of the loop. Browns, the English fashion retailer, looks like where all the Peaky Blinders shops are. Maybe I have to take a look.

But anyway, the history, the idea was born in 2007, but the Farfetch website went live in 2008. The founder and still CEO is a Portuguese entrepreneur named Jose Neves. And when the company first launched, there were only five people on the team. I think they expanded pretty quick. they got an investment from someone who did he wrote like a long form medium post on the seed investment that they made so i kind of read that kind of interesting but the company's headquartered in london has branches all over the globe they acquired browns in 2015 at jd.com took a stake in 2017 by investing almost 400 million dollars far-fetched went public in 2018 and in 2019 they

acquired both stadium goods and new guards but apparently it's set to terminate its partnership up with JD.com now that they've partnered with Alibaba. Yeah. That happened really recently, right? So it's a big switch right now. Kind of a big transition for them. Yeah. I'll hit industry and competition. Ian, do you have anything before? All right. I'll hit industry and competition. This is from the 20th, which if you don't know, that's basically the 10K. If you're an international company and you're based in the US, they say we face competition from technology enablement companies, marketplaces, platforms, and luxury sellers. So tech enablement, they define as something like a Square, Shopify, or Wix, which makes a lot of sense if you know those companies.

And then luxury sellers are department stores, online stores, things like that, very standard. Platforms and other marketplaces, I assume they're talking about, and they didn't give any specific example, but I assume they're talking about things like RealReal and, gosh, I get the name wrong. Every time it's Poshmark. Is that correct? Do we know? Ian, do you know if it's Poshmark or Poshmark? Whatever that one is. But something like that. And they estimate that there is $300 billion for the global luxury market. And I think that is currently. The company thinks that $100 billion of that will be in China by 2025. Now, the overall market could be larger then, but you kind of see why. And we'll talk about this later. They're making this big

Chinese push. Around 80% of luxury goods are still sold in person right now, projected to be about 70% by 2025. But just know that those numbers are always estimates. And I don't know, well, I guess we'll talk about this later too, about how much of this is really going to move online, but we'll kick it over to Ian, if you want to talk about management more in detail. Yep. Diving into management, the founder and CEO, as Ryan mentioned, is Jose Neves. He's been involved with fashion for basically his entire career he's a pretty young guy i think uh like 46 years old and uh in the 90s he was a coder and decided to also launch a shoe label uh called swear and so he was he was kind of intrigued by the the idea of selling things around the world

and always even he says even back then looked at it and said like we need a platform where we can sell things around the world, which obviously became reality. One quote he had in an interview with the Australian Financial Review is, it's about connecting the dots for the customer. Consumers don't differentiate between online and offline, multi-brand or standalone store. They don't care if they buy a Prada bag in Prada or online or in a department store. They just want the bag, close quote. And I think that's, you see, at least when I'm looking at Farfetch, there's so many different things that they're kind of involved in and different ways that they're trying to capture this market. And I think this kind of clarifies a little bit why

they're doing that, that it's, that they see it as all about connecting the dots for the customer and just whatever way they want to get the bag, let's figure out the best way to get them the best, most cost-effective way to get them in the bag. Um, I do generally appreciate the way that he looks at the industry as well. He's really not worried about cannibalization or, um, competition. Even he, they, they have about 1% of the industry and they just see it as just such an opportunity and that they don't really have to worry about competition or what other people are doing or other online platforms are doing because everybody can win in their estimation. So, uh, I do. I think that that's probably the right way for this business to be looking at it right now.

They have the so kind of diving more into the ownership structure, they have sort of a confusing ownership structure. JD, which Ryan was mentioning, they used to partner with still owns a stake about two and a half percent of the company. It's not a huge stake, but fairly sizable. But like, like we've talked about is no longer gonna be a partner. So they may be selling out of that um and then alibaba on uh richmond is that how you say it maybe i think you might have gotten it wrong but if you had a right but if you had a totally wrong yeah who knows you can you can let us know on on twitter or you know email send your emails to ryan but um it's uh they basically made it's a french fashion company and so they were partnering with alibaba on this french fashion

company. And so they've become, um, some fairly substantial shareholders as well. Um, Nevis owns about 12% of the shares, which are basically all class B shares, um, which have a lot of voting power. And so he's got over 70% of the voting rights. So that's one thing to look at in this company is that you really have to trust Nevis because he, um, he has voting control. He can do what he wants with this company. Yeah. That's the key. When, like, when you see this dual class thing a lot of people are like whoa that's terrible it's terrible you just have to kind of switch your mindset where all right the ceo or founder whoever is now like i gotta know this guy is on the ball or i trust him or whatever yeah it's a it's a hedge for the founders you know

they can get that funding i guess without having the risk of being ousted yeah true true and that or guiding yeah i was just gonna say when i'm looking at ownership structure one of the main things. The way I've started thinking about it is really like, if I was going to do a private deal with these people, are these people I want to be in business with for one reason or another, right? Are they, do they have, and sometimes it's not that they're bad people, but do we have the same incentives? And so if someone's got a big stake in the company, I really want to know, like, are we, are we seeking the same things, which is why it's so important to hear what management's vision is when they have a big voting stake like this. Right. And then the Alibaba investment, was that

a convertible note i saw uh i know it's kind of confusing but i thought they may have owned some convertible note i'm not sure i think i think it's both equity and a convertible note if i'm um looking at this right they part of it was a joint venture um for a new brand in china this this platform they're building in china and so um they all kind of have an ownership stake in that joint venture um but i believe you're right that there was a convertible note involved as well Okay. I'll hit valuation then. Market cap's about $19.5 billion. Ticker is FTCH. Now granted, the stock likes to go up or down like 5% a day. So make sure to convert those numbers. Those can change really rapidly. The price to, and now this isn't a traditional metric, but price to GMV,

don't laugh. I'm just going to use it to- It's a bubble metric. Yeah. Price to GMV is about 6.1. So a little rich, I would say. Trailing price to sales is about 11.7. So you can kind of see that they're actually converting a ton of that GMB to revenue and then price to gross profit, 25.3. They are technically operating cashflow positive, but a ton of that is just stock-based compensation. And they've been increasing share count a ton over the last five years. So really factor that into your assessment. Like for example, last year there was 3.4 million shares gifted to executives and board of directors. So they do love stock-based compensation, not necessarily a good or a bad thing, but just know

that you're going to face share cap headwinds. Yeah, they're not profitable right now. And there's a lot of, there are a lot of convertibles outstanding. Yes, even more. Yeah, and I think I will talk about it again when we get into my low lights. But Ryan, do you want to hit the news?

Yeah, and so as you said, GMV might seem like an obscure or pointless metric, but when you have a 30% take rate and you have first party sales, GMV can be somewhat relevant. especially with luxury goods because you're selling them at such a huge markup. But GMV grew 49% year over year to a little more than $3 billion. Revenue grew 64% year over year to 1.7 billion. This is for full year numbers. Gross margin was 46.1%. I think that ticked up

a little bit. Net loss was 3 billion. I put 3 million here, but yeah, you heard that right. net loss of $3 billion. However, there's a large discrepancy between GAAP numbers and cash flow, and we'll explain why in a second. But they had $116 million in operating cash flow. So they were not free cash flow, but operating cash flow positive, but they had $168 million in stock based compensation. So that pretty much all wipes out all their operating cash flow. But that major discrepancy between GAAP and cash flow was a reconciliation of some of their investments, I guess. It's a fair value assessment because you're required to do that with GAAP accounting. And it was a $2.5 billion write-down essentially on derivatives

that they have. And these were hedges on, I don't know, hedges on convertibles or do you know? So Ian might be able to chime in here. Do you have something, Ian? Yeah, I can chime in a little bit. So I think part of the thing here is they're they are a foreign company located in uh london and so they're not actually under us gap they're under uh uh fasb and so or not fasb i iasb or whatever it is so they're under the international standards um and so i think the way that they uh calculate some of the fair value on this type of stuff is actually different than they do it under us gap so that's part of the difficulty here i think but basically whether it's the i can't i was trying to figure out if

it was actually separate derivatives or if they were just basing this on the strike price for the convertible notes i think that's what it was too but i it was complicated it's they they're not super clear about it but what they are clear about is they say um for every dollar increase in the stock price these um notes like the fair value depending on which notes it is the fair value write down is like uh for one of them was like 22 million dollars for every dollar that the stock went up and so yeah the stocks have 50 something so right so give a little bit of relative number so basically they're they're having to write a write down a loss every time the stock goes up a dollar if that's how they're measuring it so that's nice that's kind of a cheat

code though because no it's not really a cheat code i'll get into this on my low lights but their cfo i don't know fire your cfo what is he doing these notes have like five percent rates the other i okay the other thing is i want to be alarmed by this but they know it's tricky to understand they should have been very direct about explaining it both on the 20f and in the conference call they i mean such a long 20th to 400 pages just ridiculous they had a net loss there was almost 200 percent of revenue and they they only mentioned this revaluation once on the conference call and they were like don't worry we can just it can be paid for in shares like just add it back just add it back we're good we're good it's a write-off it's a write-off

you don't even know what a write-off is uh sorry we got a little derailed but ryan anything else on that no i guess i would try to understand through management commentary i mean you can try to read the 20F, but it's very big and the terms were very hard to understand. So I guess listen to management commentary on that stuff to try to get a grasp on how those re-measurements are working. Yeah. All right. Ian, you want to talk balance sheet? Yep. The Farfetch has about $1.5 billion in cash, about $826 million in total debt. Basically, that's all convertible notes. But these convertible notes, and I know that uh, I'm sure Brad's just dying to get in here too, but they've got a ton of bad strike prices.

Um, these were written, you know, back, back in, uh, like February, March, um, of 2020, and then even up, up to more recent. Um, and they had strike prices of like $12, $16, $32, all well below, um, what this, what the stock's trading at now. And I think there's a lot of people, a lot of far-fetched bulls who think that the stock is, uh, undervalued right now too. So just really not great strike prices on those. And it's expensive for the shareholders. Just the dilution is going to be not a lot of fun, I don't think. And as we've been talking about, it's not a cash expense, these write-downs that they've been doing, or not write-downs, but these fair value measurements that they've been doing. But it is costing shareholders

indirectly through all these, the, the dilution. And so, um, I think, you know, we can, we can debate about whether the number is too high, right? Like that it's that the number that they're reporting is too high and whether it matters or not, but the reality is that shareholders are getting diluted. Um, the last thing I'll mention on the balance sheet is about a third of assets are intangibles, which is somewhat high. Um, again, there's some, the international accounting standards are a little bit different about what's valued as an intangible if I'm remembering correctly. And so, um, I think that they oftentimes the international companies oftentimes have more intangibles than, uh, us companies, but, uh, not to even with that, not too concerning. It was,

um, it looked reasonable to me in the, you know, you might see some possible write downs. I think they're amortizing some of it. So, um, you know, you, you, you'll probably see a little bit of a hit to net income but not any sort of cash expense all right okay ryan you got anything else on balance sheet okay that's gonna be it we're gonna take a break and then talk the fun stuff added advantages future growth then what we like to do like cox panoramic wi-fi includes advanced security to help protect all your connected devices you'll get real-time alerts oh like this one so you don't have to worry about malware or when your kid downloads a song from a shady link and now all your computer can play is red color red color where are you

all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app restrictions apply okay welcome in next up is competitive advantages we'll kick things off with ian as always what do you got for me i'm going to take a pretty basic one here, but I think they have a competitive advantage of scale doing $3 billion in revenue about, uh, they, they calculated as about 1% of the whole, uh, volume, not revenue, but 1.7 in revenue volume, my bad. Um, but huge scale. They, uh, I think that's a major advantage makes them the place to be. If, if sellers are wanting to use, um, their platform to, to sell their items. It's just, it creates a lot of eyeballs there. Um, it's getting some of those

network effects and flywheel. I know it's a little bit cringy on this show, but I think it's true. They get more brands, they get more consumers, their margins improve, um, which helps them to attract more brands and consumers. And it just kind of continues. And that's, I think that's the business model is, Hey, if we can get, it's, it's a classic platform business model, right? We need more people on this side, more people on this side, and it's just going to continue to grow together. And so the fact that they've already hit this, um, large scale, it gives them a competitive advantage against anyone who's trying to get into the space. Yeah, I agree there. I agree there. Ryan? For me, it's trust, particularly on the consumer side. So

everyone knows that luxury goods have a lot of replicas and fakes, and it's really easy to get ripped off, especially online. So having a brand that people trust, that's hard to disrupt. It's hard for someone to come up and build a business model that's similar to Farfetch's because you could potentially you know one one bad one one fake item could you know be the demise of a platform if the you know if that gets heard because you just can't trust it and so being the reputable place to exchange luxury goods it feels kind of hard to replace right yeah like uh trust and brand are super important with luxury i think we can all agree on that and if far touch can be that it's really hard but it's weird that they're not the actual brand i don't know

they are sometimes oh well they own some of the brands and the other thing i would say is this isn't necessarily a competitive advantage against luxury goods but um against traditional retail luxury is more resilient in down times that's true so they you know during an economic recession or like that they'll they should hopefully do better than uh you know typical retailers yeah because the people that buy have more excess cash all right uh i'll hit mine i got one mine's similar to ian's classic you know two-sided marketplace dynamic here they're not necessarily that large yet uh where someone couldn't come in and disrupt them theoretically maybe but the more customers and brands that join the site the better the competitive advantage gets so it's weird it's

It's like right now, and I guess you can kind of argue it's similar to the easiest example of something like this was like eBay or Etsy, where when they're smaller, there's a huge threat for someone to come in and just, all right, we're going to throw some money at it, get some marketing going. But the larger and larger they get, the better, theoretically, if they keep up the brand, like Brian is saying, they keep up the customer trust, theoretically, that moat gets stronger and stronger. Yeah, I'd say the only real competitive threat or the only thing preventing them from grabbing more market share is the really, really prominent brands, the prominent luxury goods going DTC. So for preholdings kind of? Yeah, that's sort of, I would say, what probably gobbles up most of the market. I mean, a lot of this stuff is still done in store, and I think they have room to grow from here. But I mean, there is trust compared to traditional marketplaces, but there's probably

more trust when you buy it directly from a brand's website. Yeah, I agree. Ian, you have anything else on that? And if not, kick off future growth opportunities. Yeah, my future growth opportunity for them is just to continue to increase the volume from their top sellers. And that's something they kind of highlighted in the most recent conference call is the top 10 partners increased their listings by more than 70% in Q4. The top 100 brand partners have 100% retention over the past three years, which is pretty incredible. Like for 100 of anything to have 100% retention, the platform seems to be working. And so I think if they continue to, just like we talk about with like net revenue retention with software companies,

I think if they can continue to kind of grow those relationships with many of these brand partners, just driving more and more volume from those sellers can really have a big impact and is probably more effective than trying to attract lots of smaller sellers onto the platform. Yeah, and it gets them to that global audience where typically, I mean,

well, I guess you could say like, all right, these companies, like Ryan was saying, can get their own D2C website. One, that costs a bit. It takes a while to make that really good. But two, Farfetch has the differentiator, and I guess Ryan will talk about that,

entering china where that internet isn't really like the the open internet um and it really hits that chinese luxury market where i don't know farfetch can give you the distribution i guess it's kind of just the whole thing there yeah it gives the sellers an advantage and it gives i guess the consumers an advantage as well especially if their logistics is uh more efficient than that it's kind of taking it traditionally for a brand yeah but i'll get into mind the alibaba partnership seems i mean that's the major growth opportunity they highlighted on their 20f uh so in november they announced this partnership november of 2020 and they're calling it farfetch china so they're basically putting farfetch's marketplace or luxury channel

on alibaba's e-commerce site for reference alibaba's alibaba's china retail marketplaces have 779 million active consumers across the platforms and china is expected to become the largest luxury market in the world in the next five years representing more than 100 billion dollars in luxury sales so it's a huge market um and i actually you can argue that you know they have their hands tied being under alibaba but i would say that's probably the right way to go about it um it's the only way partnering with you can't go without them the biggest company in china they don't let you go unless you're well then yeah then that's the only way to go yeah it's It's like Starbucks, even Starbucks can go in without them, but I'll hit, uh,

my future growth opportunity. It's beauty. Next logical step. Um, management set, I think on the common skull, they say all over that. Something along those lines is coming in 2022, which it's nice to see the product roadmap laid out like that, but I don't know. You got like, don't, you don't just, I don't know. You gotta hold your cards close to the chest sometimes guys. I don't know, But in all reality, it seems like a pretty good thing to do. You can put a lot of beauty stuff on there.

The current customer base probably overlaps a ton for people that like beauty products. This category has better margins, especially through e-commerce. So I think that's a pretty easy growth opportunity for them. Anything else? No, I mean, yeah, those are some of the big ones. everything there it's also worth noting that all those future growth opportunities aren't just us guessing like they're on the ball with most of those um i guess yeah i don't know how i feel about pre-announcing stuff two years early but yeah oh may spaxley oh but yeah uh

highlights and lowlights ian you want to go first yeah i think the highlights for me start with the revenue growth and the market opportunity they've had over 60 revenue growth for the last couple of years. And that's just, it's pretty impressive, particularly in a pandemic. I think that they were able to do that. We were just looking at Revolve a couple of weeks ago, who was much closer to flat revenue. And I think, you know, Ryan, you mentioned it earlier about how those luxury goods are sometimes more resilient in these recessionary environments. And I think this was an example of that and the way that they grew revenue this year was really impressive. um i also like the e-concessions model they call it where um the stores are kind of it's like the

amazon model basically that you can set your own prices and and um and that they're not it's not the traditional uh wholesaler to retailer relationships they're actually letting them have more control over pricing and i think that more things are going to go that direction in the future and so i'm i think that the vision's good there i think some of my the low lights for me are some of these um and i know brett's going to get deeper into these but some of the some of these uh just the debt that they've issued does not make a whole lot of sense um i think there's some i i don't love the 70 ownership or voting rights from the founder um the adjustments they make to adjusted evita to get it from you know negative 40 to positive is a little bit concerning

to me but um anyways i just i i'd say yeah that's that's kind of my low lights right i'd say uh so you mentioned revolve group the thing that may have helped farfetch and again they were growing faster than revolve has ever grown so they got them on that front but revolve is mainly in the u.s u.s has been a lot worse with the coronavirus farfetch is a lot more in china so that might have been kind of the market dynamics there and and it's luxury spend i mean yeah and revolve is less luxury. So I don't think it's apples to apples, but that is a good comparison to maybe Farfetch is executing better. Yeah. And I guess that's sort of my highlight is the business model seems fairly resilient. I think the TAM, I hate to be a TAM guy, but the TAM is very large. And it seems

like they're doing a lot of things right, but there's just these little red flags scattered throughout the 20F that were hard to overlook. I guess another one, there is two different outstanding legal things going on. There was a page full of different internal controls or adjustments to internal controls, related party transactions, all that stuff. All the good stuff. Even a small, there's like that quote, a small leak can sink a large ship. But you want sort of a bulletproof financial statement, and it's hard, especially when

you're not clear about why those derivatives are tanking your earnings, it's hard to get around that. Yeah. Don't try to baby your investors, you know what I mean? Explain what they are. Yeah, if they're non-cash targets, just explain that. Don't beat around the bush. And then I'll probably talk about some of the other low lights too with that.

But on the TAM argument, are we sure that this luxury stuff is going to go that much to e-commerce? It feels like something that, especially like jewelry, I don't know whether- I think it will. I think it's getting over the hurdle of do I trust buying online, and I think Farfetch is sort of shrinking that hurdle. Maybe. Maybe.

I don't know. but I am a little skeptical. Don't think I have a take either way, but I would just be worried that luxury isn't going online and maybe that's, they're kind of hedging themselves with the store opportunity too. Yeah. I think they talk about that a little bit, that they're really trying to have some physical locations as well. What, what that looks like exactly. I think they're still figuring out what, um, they want to look that, what that to look like going forward and what the mix they want it to be. But do I think all, you know, a hundred percent or even 90% of luxury is going to start selling online? No, probably not even in our lifetimes, but you

know, is it going to improve from where it is today and get to maybe 50, 50? I could see that happening. Yeah. I just, the only thing is I kind of thought about when we interviewed Dan Klein, uh, who is, he works at seven investing, one of the lead advisors, and he's probably one of the top retail experts out there. He was like, he kind of had this point that I've been thinking about for a long time where he said, if something didn't go e-commerce last year, there better be a good reason for it to go e-commerce in the future yeah that is yeah that is very true i it i'm kind of stuck between like people want to vet these products in person and at the same time like how many times have people underestimated how what would go online

that's true that's very true and maybe when things get you know you trust barfetch they maybe add in some AR things. I don't know, something like that, but I'll hit my highlights and then we'll wrap things up. I like that platform tools thing. That feels pretty moaty to me, that Shopify competitor type thing. It seemed like it was a decent amount of their revenue and maybe that's higher margin. Good gross margins overall. Pretty confident top line growth can continue on that. Really impressive trailing top line growth. Low lights though. Ryan mentioned some of these, Ian mentioned some of these headquartered in the Cayman islands that doesn't mean necessarily a bad thing but it's a tiny bit like kind of throws up your

you know i don't know antenna a little bit it's not a giant one but why not why why are you there but but isn't chit chat money like the most popular investing podcast and that's right we do like the caymans we do like don't bash the caymans that's our audience well the only reason that the cayman islands always or malta or whatever i guess you're just doing it for tax reasons but i always ask why are you there not in your home country why would you want to pay more in taxes i guess that's a responsible decision farfetch has got quite the amount of deferred tax x assets so they're not gonna be paying taxes for a long time we got plenty of losses to write off that's yes yes but uh i think the alibaba partnership well it can give them that

secular growth um in china it gives them that advantage i think the downside of that is you're at the mercy of alibaba and if you're at the mercy of alibaba you're at the mercy of what you know the powers that be in china want and they can you know they can see farfetch and they can close their fists and take it away that easily that just seems risky to me um related party transactions the weird liabilities huge share dilution um terrible debt management i if you were a shareholder a year ago that's great but we're trying to talk about being shareholders now it's also i don't know is it a red flag to you that like the cfo priced these convertibles where they did it almost makes me feel like the market bid this up more than the

people that know the business best yes like they were they they missed by a long shot so it was and they know the business pretty damn well so yeah if you're a shareholder then that's great but if you're trying to identify whether you should buy shares now it's a huge negative um either they have a terrible cfo or the shares are are fairly overpriced yeah and then the last one um and this just might be the structure for doing international stuff but they got like 40 subsidiaries uh that it's just impossible to investigate the stuff like that it just reminds me is now all these things don't mean necessarily that they're doing bad things and they probably aren't but these are the bad things you these are the things you see in companies that do bad things

and it just i don't know it's it's like you're turning over the rock and you see a lot of barn you're not gonna you're not gonna invest in one part yeah it's the small league can sink a large ship yeah like enough red flags should should give you maybe a reason out yeah all right more or less interested i think we might have i think i put my uh or um show my cards there but ian we'll kick it off first with you yeah this was a company i thought i was really intrigued when we looked at revolve and i know it's a different business than farfetch and farfetch is focused on these luxury goods and and um but i i was intrigued by revolve i thought farfetch is kind of similar growing even faster um and it just it was like it seemed unnecessarily complicated

which is kind of like the whole um maybe that's what this episode should be titled just unnecessarily complicated but um and we've we've struggled through that today trying to figure out what is going on and with the subsidiaries and the debt and everything it's just like it seems like it should be a really simple business model and it should be really easy to explain and they have like five strategic steps that they did last year and five new strategic steps that they're going to do next year and all this type of stuff and it's just like i can't wrap my head around it really and it doesn't seem like it should be the type of thing that i can't wrap my head around but i can't so so you're less interested so i'm less interested yeah yeah i agree with all those

points it's way too complicated ryan what are your thoughts i would i would also say like if you're looking at china as the future growth opportunity which i did put down there like China isn't new to them they were partnered with JD.com since 2017 so it's not like a brand new market there are some it's a business I wanted to like

and I guess the CFO thought maybe the price is too high but I didn't think the price was irrationally high if they could get if they could expand those contribution margins and keep the third party take rate high and continue to bring stuff in-house, but there are just too many red flags and it's hard to just turn a blind eye to them.

Yeah, I agree with all those points. That's the main reason I'm less interested. And then on a more business level, I do worry about that TAM. And I know that that's not something you're typically supposed to worry about, but let's say, okay, the markets, they capture third of the market that's 100 billion dollars based on the worldwide estimates and i said they do that by 2030 you have 100 billion in gmb let's say you have like a 30 percent take rate because the take rate is going to come down over time you would think um i think 30 percent take rate well first party depends on first party but let's say conservatively because we're trying to do some estimates but out to 2030 30 percent take rate maybe that's too well uh so you've got 30 percent

take rate that's 30 billion dollars in revenue let's say you have a 20 free cash flow margin that's six billion free cash flow the current market cap fully diluted on all these current convertible notes is like 25 billion i mean if they succeed what are we looking at here over the next 10 years a forex return i don't know it doesn't really excite me yeah maybe you might have just done too much mental math but yeah it might be too hard to track for listeners but Oh, I'm just saying that if you have 6 billion, yeah, sorry, that's too much numbers. But if you have 6 billion in free cashflow, I don't know, what's that valued at? A little over a hundred billion dollars? If this company had 6 billion in free cashflow in 10 years, I wouldn't mind

owning them. But that's the best case scenario. That's what I'm saying. That's the best case scenario. I don't know. Maybe. I'm less interested. Maybe. It feels a little far-fetched. Good one. That's a great way to end it. Ian, do you have anything before we kick things off? And Ryan, you are the new company of the week. I have something I can give to you. I have one in mind. I'm going to go with GoPro. Nice.

It's a turnaround story. I know you might seem unexcited, but it's a little bit of a pivot in the business model. There's a subscription element. We love to see that. We were talking about software as a service transition. Everyone should love that. Yeah.

There you go. All right. That's going to do it. Make sure to subscribe to 7investing. they got new picks and they got a fantastic new advisor joining the team. You get $10 off with our code CCM at checkout. Remember, we are not financial advisors. Anything you say on the show is not formal advice or recommendation. Ryan and I are general partners at Arch Capital. Arch Capital may hold securities discussed in this podcast. Thank you all for listening. We'll see

you next time. Bye.