720  High-Growth Companies
optimistic forecast, but structural similarities between the online luxury and 
clothing markets make this scenario entirely plausible.
Scenarios B through D follow a similar construct but vary key assump-
tions. In scenarios B and C, penetration rates reach only 30 percent, reflect-
ing the desire among luxury goods buyers for a greater physical shopping 
experience than with other categories. Farfetch’s market share reaches a 
healthy, but not overly aggressive, 8 percent and 5 percent, respectively. 
Margins are somewhat lower than the best e-tailers because of stronger sup-
plier market power, in the range of 14 to 18 percent. Scenario D is character-
ized by sluggish growth in online penetration that more closely mirrors the 
home furnishings industry, a segment that is less conducive to electronic 
retail. In scenario D, by 2028, online penetration is 15 percent, and Farfetch 
achieves revenues of just $1.2 billion. Increased pressure from new entrants 
and more widespread omnichannel adoption by individual brands result in 
more moderate margin expansion, reaching only 6 percent, comparable to 
discount retailers.
Weight Scenarios
To derive current equity value for Farfetch, weight the intrinsic equity valu-
ation from each scenario by its estimated likelihood of occurrence, and sum 
across the weighted scenarios. Exhibit 36.9 lists the intrinsic equity valu-
ations and the probability of occurrence for each scenario. At a 10 ­percent 
probability for scenario A, 30 percent for scenario B, 35 percent for scenario 
C, and 25 percent for scenario D, Farfetch’s equity value equals $6.1 billion 
and value per share at $20, matching its 2018 IPO price. Whether this price 
is appropriate depends on your belief in the forecasts and their respective 
probabilities. Were they too optimistic, too pessimistic, or just right?
EXHIBIT 36.9  Farfetch: Probability-Weighted Expected Value
Scenario
Intrinsic 
equity valuation, 
$ billion
×
Probability, %
=
Contribution to 
equity valuation, 
$ billion
Scenario A
19.6 
10 
2.0 
Scenario B
8.2 
30 
2.5 
Scenario C
4.1 
35 
1.4 
Scenario D
1.0 
25 
0.2 
100
6.1 
Shares outstanding, millions
300.0 
Value per share, $
20 

Uncertainty Is Here to Stay  721
Uncertainty Is Here to Stay
By adapting the DCF approach, it is possible to generate reasonable valuations 
for dramatically changing businesses. But investors and companies entering 
fast-growth markets like those related to new technologies and complex busi-
ness ecosystems still face huge uncertainties. To see why, look at what could 
happen under our four scenarios to an investor who holds a share of Farfetch 
stock for five years after buying it in 2018 for $20. To facilitate the calculation, 
we assume the investor gradually learns about the most likely scenario.
If scenario A plays out, the investor will earn a 39 percent annual return, 
and as of 2018, the market will seem to have drastically undervalued Farfetch. 
If scenario C plays out, the investment will make just 2 percent annually, fail-
ing to earn its cost of capital. If scenario D plays out, the investment will lose 
23 percent a year, and it will appear that the company was significantly over-
valued in 2018. Going forward, these high or low potential returns should not 
be interpreted as implying that the current share price was irrational; they 
merely reflect uncertainty about the future.
Accurately predicting which scenario will occur is a laudable goal, but 
unlikely to happen. Investors struggle to incorporate new information every 
day, and this leads to high volatility in the share prices of young companies. 
Farfetch, for instance, saw its price rise 50 percent on the day of its initial pub-
lic offering (IPO). Then its shares dropped 40 percent in August 2019, when 
EXHIBIT 36.10  Farfetch: Share Price, 2018–2019
$
0
5
Sept. 2018
Dec. 2018
Mar. 2019
June 2019
Sept. 2019
Dec. 2019 
 
10
15
20
25
30
35