Farfetch's valuation

How Farfetched is Farfetch’s $1 Billion Valuation?

Iman Ahmed, Business of Fashion, 06 March 2015

Further proof that valuations are driven by more than just multiples of EBITDA... And that's a good thing!

"According to market reports, the company, which has yet to cross over into profitability, is estimated to drive about $350 million in gross merchandise volume (GMV) with about $90 million in resulting revenue from commissions (the company is said to take a 25 percent commission from its partners).

A company’s valuation should ultimately be driven by its momentum and growth, the scale of its revenues and the ability to drive cash flow. Indeed, according to a blog post by the highly respected investor Fred Wilson of Union Square Ventures, marketplaces should be valued as either 1x gross marketplace transactions (a measure of scale) and/or 20x EBTIDA (a measure of profitability and cash flow) “for internet marketplaces that are growing fast and are category leaders.”

In the case of Farfetch, an EBITDA multiple is not possible as the company is not profitable. But if Farfetch were valued at 1x GMV, it would be worth about $350 million today using Wilson’s 1x multiple. Or, said differently, Farfetch’s current valuation is almost 3x its estimated GMV and much higher than Wilson’s multiple would allow."

Valuations do have unquantifiable aspects. The price is what the market can bear. This valuation may tell us something about the market, but there is always room for unquantifiable aspects in 'hard numbers'.