Shares of Farfetch (NYSE: FTCH) were climbing higher this week, according to data from S&P Global Market Intelligence. The online luxury platform saw some good news from its partnership with luxury holding company Richemont as well as developments with the important Chinese market. Shares are up 13.3% this week as of 12:54 p.m. ET but are still off around 97% from all-time highs set during the pandemic.
While these news reports are helpful, only one thing will matter for investors in Farfetch over the long term: profits.
Late last week, investors got an update from Richemont on its partnership with Farfetch, which is multifaceted. Richemont is the owner of multiple luxury brands, including Cartier as well as an online competitor to Farfetch called YNAP. In a deal announced last year, Richemont is giving its YNAP assets to Farfetch and is starting to list all of its goods on the Farfetch marketplace, indicating that Farfetch is performing much better than YNAP in building an online luxury goods platform.
In exchange for these assets, Farfetch is giving Richemont a sizable ownership stake in its business. Last Friday, Richemont released its latest quarterly earnings and said that its partnership is going well. According to management, “Everything we expected in terms of technology from our Farfetch friends, they’ve delivered,” which is a good sign for Farfetch’s future partnership with the luxury giant.
Another development that may have affected Farfetch’s stock price was the successful trip of China’s leader Xi Jinping to meet with U.S. President Joe Biden in San Francisco. China is perhaps the most important market for the luxury industry and an improving relationship with the U.S. could mean more open business relationships with outside countries. Nothing significant was announced from Farfetch this week, though.
A well-running partnership is great, and any positive news on China is not going to hurt Farfetch. However, the company still has major problems generating positive free cash flow, which is why the stock is down so much from all-time highs. Since going public, Farfetch has never generated positive free cash flow over a trailing-12-month period and has seen its cash flow move in the wrong direction in recent years. Over the last 12 months, free cash flow was negative $439 million.
If this can be fixed, the stock will likely work well from here. But if Farfetch never generates a profit, there will be more pain ahead for shareholders.
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Farfetch. The Motley Fool has a disclosure policy.
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