716  High-Growth Companies
be returned, they are netted from the original order count. We also net out process 
fulfillment costs, leading to GMV, net of fulfillment revenue of $1.3 billion—just 
under 4 percent of the online luxury market, estimated at $32 billion.
We assume that 2028 is the year that Farfetch matures into a profitable, 
stable company, so we create our projections for this scenario around esti-
mates for that year’s results. We project 9.9 million unique customers and 2.5 
transactions per customer to arrive at 25 million transactions at an average of 
$700 per transaction. That leads to gross transaction value near $17.5 billion. 
After returns and adjustment for fulfillment costs, revenues from Farfetch’s 
digital platform would be $12.1 billion.
With 93.3 percent of revenue generated from third-party sales and a 29.4 
percent take rate, third-party revenues equal $3.3 billion. First-party rev-
enues equal $815 million (that is, 6.7 percent of $12.1 billion). Other reve-
nues, primarily from process fulfillment, outsourcing, and in-store sales, are 
$1.1 billion, for total revenues of $5.3 billion.
We also looked at this revenue estimate from the perspective of the total 
market and Farfetch’s share. The total luxury-goods market, growing mod-
estly, reaches about $500 billion in 2028. Assuming 30 percent online penetra-
tion and Farfetch achieving an 8 percent market share (with adjustments for 
first-party versus third-party sales and in-store sales) brings us to a scenario 
in which Farfetch achieves 2028 revenue of $5.3 billion.
One of the key uncertainties for estimating Farfetch’s revenues is online pen-
etration of the luxury-goods market. For this scenario, our projected 30 percent 
penetration is based on a comparison with other product categories. Exhibit 36.6 
EXHIBIT 36.6  U.S. E-Commerce Penetration by Vertical, 2000–2023E
%
Media
80
70
60
50
40
30
20
10
0
2000
2005
2010
2015
2020
Toys
Office supplies
Sporting goods
Clothing and accessories
Home furnishings
Consumables
Automotive 
Source: U.S. Census Bureau; Cowen and Company estimates.

A Valuation Process for High-Growth Companies  717
presents e-commerce penetration in the United States across various product cat-
egories. Most sales of media and toy products now take place online. In contrast, 
luxury goods lag most product categories. One product category that analysts 
point to as a useful comparable is clothing and accessories, projected to reach 
42 percent by 2023. Luxury-goods customers like to feel and touch their pur-
chases, so for this scenario, we’ve kept penetration at 30 percent. In the most op-
timistic scenario we’ll use for our valuation, we’ll bring penetration to 40 percent.
Estimating Operating Margin, Capital Intensity, and ROIC  With a revenue 
forecast in hand, next forecast long-term operating margins, required capital 
investments, and ROIC. To estimate operating margin, triangulate between 
expected price versus cost to serve and operating margins for established 
players. Refer to Chapter 8 for the range of ROIC for different industries and 
a discussion of the drivers of ROIC. Chapter 6 discusses the types of business 
conditions that lead to high levels of ROIC from network effects.
Because the underlying economics of Farfetch’s business segments differ 
so much, it is important to evaluate each segment separately. Regarding the 
company’s third-party marketplace, Farfetch neither manufactures nor holds 
inventory, but only facilitates transactions between other parties. Therefore, 
the segment has a low cost of sales, requires little capital, and is highly scalable. 
To project steady-state margins and capital intensity, we look to established 
players that operate technology marketplaces that earned margins exceeding 
20 percent. While these competitors can provide some insight on the evolution 
of margins and capital intensity, differences in each competitor’s business mix 
may hamper direct comparison. Therefore, substantial judgment is required.
In the case of first-party sales directly to the consumer, margins will more 
closely resemble those of an online e-tailer (for sales conducted online) or a 
luxury-goods retailer (for sales conducted in their stores). In contrast to the 
third-party marketplace, growth will require purchasing more goods, holding 
more inventory, and perhaps someday capital investment in warehouses and 
stores. These margins are much lower than for technology marketplaces, often 
far less than 10 percent.
Exhibit 36.7 presents one research analyst’s forecast of how Farfetch’s mar-
gins might evolve over time. Although gross profits were positive in 2018, 
the company was losing money, as marketing and other support expenses 
exceeded the gross profits from product sales. Technology costs and general 
expenses are expected to rise as the company grows, though at a slower rate 
than revenue. As a consequence, these expenses will drop as a percentage of 
sales, and operating margins will increase. This is not the case for every ex-
pense. Some accounts, such as cost of sales, will remain a relatively constant