What happened
Shares of Farfetch (NYSE: FTCH) were gaining today on a down day for tech stocks. The catalyst appeared to be good news out of China as the government announced plans to get rid of its quarantine rule for inbound travelers. It was the latest step by Beijing to end its Zero-COVID-19 policy, reopening the economy and giving a boost to Chinese stocks.
As a result, the stock finished the day up 10.1%.
So what
China is Farfetch's second-largest market, and the luxury fashion platform sees China as its most important growth market. It's teamed up with Alibaba and Richemont in China, giving it the reach of Alibaba's Tmall. In its annual report, it said that China is expected to become the largest luxury market in the world by 2025, worth more than $100 billion in annual sales.
Strength in China is one reason why Farfetch saw sales spike in the early months of the pandemic, but it's also been a significant headwind over the past year as Farfetch's gross merchandise volume has been essentially flat.
The company also disappointed the market earlier this month when its 2025 guidance was weaker than expected.
Now what
As a result of its disappointing performance this year and its weak long-term guidance, the stock has plummeted, down 87% this year, but that has set up a potential buying opportunity if the company can return to growth.
Improving results in China are a key part of that formula, and investors are likely to respond well to more signs of reopening there. Considering the stock now trades at a price-to-sales ratio of less than 1, it has considerable upside potential if the business can gain traction again.
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Jeremy Bowman has positions in Alibaba Group. The Motley Fool has positions in and recommends Farfetch. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
