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Morning Report:听Luxury fashion and ecommerce company may aim for a $5 or $6 billion valuation when it goes public. Does that make sense?

Farfetch’s impending IPO could fetch a high price if the gets the valuation it wants. According to , the quickly growing and unprofitable company for a valuation in the $5 billion to $6 billion range.

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Is the firm worth such a figure? To answer the question, let’s take a look at its last few private valuations and compare its projected worth against its financial performance.

Prior Valuations

Farfetch raised a in May of 2016. The round raised the valuation of the British company to around $1.5 billion after the new equity was counted.

The company was, therefore, a unicorn before it raised its听 from Chinese Internet giant in June, 2017. Regrettably, the valuation at which JD invested the capital isn’t known.

However, there were signs that the company’s worth jumped during the capital event: Around the time of the JD round,听there 听that Farfetch could aim for an IPO valuation of around $5 billion.

So the firm’s valuation likely went from around $1.5 billion in 2016 to something at least $400 million higher in 2017. It is likely now shooting for a multiple of its Series F valuation as it goes public.

Valuing Growth

When Crunchbase News covered Farfetch’s IPO filing we followed a mostly performance angle, leaving valuation talk aside. After all, the company will set an IPO price range and we’ll be able to run the numbers from there.

However, with the possible goal posts set at $5 billion and $6 billion we can do a little work.

Let’s do some basic stuff first. Farfetch full-year 2017 results and half-year 2018 results, but we can get trailing twelve-month figures by summing its last four quarters together.

Here are the resulting sums:

• Farfetch revenue, trailing twelve months: $480.9 million.
• Farfetch run rate (most recent quarter times four): $579.2 million.
• Farfetch gross profit, trailing twelve months: $247.3 million.
• Farfetch gross margin, trailing twelve months: 51.4 percent.
• Farfetch loss after tax, trailing twelve months: $151.4 million.
• Farfetch net margin, trailing twelve months: -31.4 percent.

With those, we can do some work. Bear in mind that the firm’s operating and investing cash burn rates are increasing as the firm’s after-tax losses rise and its EBITDA becomes even more negative.

At a $5 billion valuation, Farfetch is shooting for a trailing revenue multiple of 10.4. That falls to 8.6 when we use a run-rate figure for the company. At a $6 billion valuation, the two figures rise to 12.5 and 10.4, respectively.

Those are, in effect, SaaS multiples. But Farfetch is an ecommerce company that also has a physical-retail component. That places it pretty damn far from software profits and recurring revenue.

There is a good reason why Farfetch may hope for such a rich revenue multiple and a good reason why not. 1 The anticipated multiples may make some sense given that Farfetch is growing faster than most SaaS companies. The company grew 55 percent from H1 2017 to H1 2018鈥攆ar greater than the听median for cloud and SaaS companies.

On the other hand, with gross margins of around 50 percent, Farfetch generates far less profit per dollar of revenue than most software companies, meaning that its revenue is, dollar-for-dollar, worse. That the company is also quite unprofitable on an after-tax basis isn’t encouraging either; the firm has reached scale but is moving further from the black, a bad sign.

Farfetch is, therefore, asking for a SaaS multiple with worse margins and ballooning losses, a tough sell when its revenue growth is decelerating听(the company grew a faster 59.4 percent from 2016 to 2017 compared to its most-recent 55 percent pace, and an even faster 70.1 percent from 2015 to 2016).

Adding to above, on comparable businesses, coming to the following conclusion:

If Farfetch really is able to crack online luxury retail without becoming a big spender itself, then it deserves a premium. But given that it is hard to see how its investment needs will wind up being as slim as the cigarette pants on its site, its prospective valuation might prove to be quite farfetched.

We can safely wrap by saying that a $5 or $6 billion valuation for the company is expensive, given what we can figure out from this distance.

But it’s 2018 and growth is worth more than it normally is. I suspect that the pricing of Farfetch’s IPO will be illustrative as to the current appetite of the public markets for high-growth, high-risk tech shares.

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