718  High-Growth Companies
proportion of sales. This is because the company will need to purchase addi-
tional products to support higher sales.
For 2028, the exhibit shows a forecast operating profit margin of 18 per-
cent, which we’ll use in our scenario B. Later, we’ll show a range of margin 
forecasts. We’ve also assumed that Farfetch’s capital productivity is a hybrid 
of a marketplace and e-tailer in proportion to Farfetch’s relative third-party 
versus first-party sales.
Work Backward to Current Performance
After completing a forecast for total market size, market share, operating 
margin, and capital intensity, reconnect the long-term forecast to current per-
formance. To do this, you must assess the speed of transition from current 
performance to future long-term performance. Estimates must be consistent 
with economic principles and industry characteristics. For instance, from the 
perspective of operating margin, how long will fixed costs dominate variable 
costs, resulting in low margins? Concerning capital turnover, what scale is 
required before revenues rise faster than capital? As scale is reached, will com-
petition drive down prices? Often the questions outnumber the answers.
To determine the speed of transition from current performance to target 
performance, examine the historical progression for similar companies. Un-
fortunately, analyzing historical financial performance for high-growth com-
panies is often misleading, because long-term investments for high-growth 
companies tend to be intangible. Under current accounting rules, these 
EXHIBIT 36.7  Farfetch: Current and Forecast Margins, 2017–2028E
% of revenues
Operating margin
General and administrative
expenses
Technology expense
Demand generation expense
Cost of sales
140
120
100
80
60
40
20
0  
2017
2018
2019E
2020E
2021E
2022E
2023E
2024E
2025E
2026E
2027E
2028E
2
6
11.5
13.5
15
18
Source: Farfetch F-1 filing and 2018 20-F filing; Cowen and Company estimates.

A Valuation Process for High-Growth Companies  719
­investments must be expensed. Therefore, both early accounting profits and 
invested capital will be understated. With so little formal capital, many com-
panies have unreasonably high ROICs as soon as they become profitable.
Develop Scenarios
A simple and straightforward way to deal with uncertainty associated with 
high-growth companies is to use probability-weighted scenarios. Developing 
even a few scenarios makes the critical assumptions and interactions more 
transparent than you will achieve with other modeling approaches, such as 
real options and Monte Carlo simulation.
To develop probability-weighted scenarios, estimate financial perfor-
mance for a full range of outcomes, some optimistic and some pessimistic. 
For Farfetch, we have developed four future scenarios for 2028, summarized 
in Exhibit 36.8.
In scenario A, we forecast that Farfetch benefits from favorable market 
conditions and delayed competitive entry. While the aggregate luxury-goods 
market continues to grow at a steady pace, online penetration in the space 
accelerates beyond analyst expectations as brands and consumers quickly em-
brace electronic channels. Online adoption in the luxury-goods market mimics 
the pattern of the clothing market, peaking at 40 percent penetration. Farfetch 
achieves 12 percent market share, leading to $11.4 billion in revenue in 2028. 
Competitive entry is forestalled, and operating margins approach those of 
best-in-class technology marketplaces at 22 percent. Scenario A represents an 
EXHIBIT 36.8  Farfetch: Key Drivers by Scenario, 2028 Forecast
Online 
penetration of 
luxury, %
Farfetch 
market 
share,1 %
Total 
revenues, 
$ million
Operating 
margin, %
Description
Scenario A
40
12
11.4
22
Online penetration of the luxury market 
accelerates, following the path of clothing and 
accessories; margins are strong as the 
company leads the category.
Scenario B
30
8
5.3
18
Online penetration follows historical 
progression; margins match analyst 
expecations.
Scenario C
30
5
3.3
14
Online penetration follows historical 
progression; margins fail to materialize as 
larger competitors enter the category.
Scenario D
15
4
1.2
6
Online penetration fails to meet expectations; 
margin pressure intensifies due to large-scale 
entrants and increased omnichannel presence 
from traditional retailers.
1 Measured as gross merchandise value to online purchases.