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Morningstar | Launching Coverage of Farfetch With No-Moat and Stable Trend Rating and $17.10 FVE. See Updated Analyst Note from 26 Nov 2018

We are initiating coverage of Farfetch, the leading platform for the online distribution of personal luxury goods, with a no-moat and stable trend rating and a fair value estimate of $17.10 per share. In our view, the shares look expensive, as the market seems to underappreciate mounting competitive threats. Hence, we would recommend investors to wait for a better entry point into the name.

We believe Farfetch benefits from traces of a network advantage moat source, but we lack confidence in the company's sustainable economic profit generation, given its limited customer reach (we estimate its active customers are less than 0.5% of the luxury purchasing population), lack of monetization even at elevated third-party take rates, and potentially intensifying competitive pressures, given the industry's early stages of development.

We think Farfetch is well positioned to benefit from the growth of online luxury purchases, which we forecast to increase to around 20% of total industry sales by 2022 from 9% in 2017. We believe the online luxury space will be dominated by several strong global players, of which Farfetch could be a part. We expect Farfetch to gain share of the luxury e-commerce market from around 3% in 2017 to a high-single-digit percentage by 2027, but to do so at a cost of third-party take rate pressure and lack of scale on demand generation expense. We forecast the company to turn profitable by 2022 and reach a 17.7% margin by 2027 as operating expenses are scaled against growing revenue.