I recently ran a graph of two of my family’s properties, Farfetch (NYSE: FTCH) And the SmileDirectClub (Nasdaq: SDC). Both stores were brutalized by Mr. Market. Farfetch shares are down 84% since January 1, 2021, and SmileDirectClub shares have collapsed 90% in the same time period.
So, as always, there are only three things you can do: buy, sell or hold. In this particular case, in August my family sold our SmileDirectClub stock, and we doubled our Farfetch position. So, why did we do that?
I was very optimistic about SmileDirectClub in 2019
SmileDirectClub is an internet company that provides an easy, Direct-to-consumer experience in health care. Instead of spending a lot of money on going to the orthodontist, you can get your smile fixed by subscribing to the company’s clear plastic retainers. These are like servants that Alignment Technology which have been developed many years ago and have been patented.
When my family bought the stock, the numbers were big. Smile generated $586 million in sales over the subsequent 12 months, and had a revenue growth rate of 113% over last year. In addition, the market opportunity was high.
Unfortunately, the growth story has stalled. Smile trying it The orthodontic industry is disrupted, largely dispensed with, as a medium. Not surprisingly, the industry has been resisting, trying to claim that these servants pose health risks.
When investing in disruptive businesses at an early stage, you’ll want to pay attention to the idea of ”crossing the chasm.” Early in the product life cycle, customers who have tried this new thing are risk takers. What you want to happen is that more traditional people (the vast majority) start adopting the product as well.
It’s 2022, and Smile seems to be having a hard time making it to the mass adoption stage. Revenue over the past 12 months was $541 million. This is where the smile was three years ago. So achieving zero growth in three years is more than disappointing.
In addition, there is a flaw in this business model. Once you fix the person’s smile, you’ve lost that customer. There is no repetitive work. A smile can make up for this with a strong word of mouth. It is assumed that many people whose smiles have been repaired will have children, and their smiles will also need to be repaired.
One of my favorite business models involves repeat customers. It is a weaker business when you have to constantly spend money to attract new customers. For now, that’s what Smile has to do. Profits remain elusive.
Farfetch has a stronger business
Farfetch is an online trading platform for the high fashion industry. Whenever I see models on the catwalk, I always think, “I never see such clothes in real life” and “Who buys these things?” But in reality, the high-end fashion industry is a huge market that will generate an estimated revenue of $97 billion in 2022.
Online trading remains one of my favorite investment ideas. My early investment Amazon It is the basis of my entire investment philosophy. This stock has made a huge leap from $4 billion to over $1 trillion. If you want me to jump up and get excited, just whisper the words, “Amazon tried to compete with them and gave up” in my ear. That’s why I invested in ShopifyThis is why I made early investments in Farfetch.
Unlike Smile, Farfetch stock has been a pretty cool winner for me for a few years. Like a lot of internet names, the stock was criticized in 2021, but the business is in great shape. Farfetch has its own website and web traffic, but most of its business offers Software as a Service (SaaS) for the high-end fashion industry.
I love this kind of subscription business where customers lock in and you enjoy a lot of it Recurring revenue. High-end fashion houses like Prada and Kirin want to protect their high-end brands and thus reduce their distribution to general retailers like Amazon. Farfetch recently consolidated its dominance in online fashion when it I agreed to get it Yoox Net-a-Porter, Italian online fashion retailer, from Richemont. The stock market was happy (which is good news because Farfetch is using its shares to pay for the acquisition).
Farfetch’s revenue growth slowed to a crawl in 2021, rising just 6% last quarter. I blame macro events for this slowdown. China is a major customer of the high-end fashion industry, and of course, China is in disarray now that its authoritarian government has shut down a large part of its economy. Sooner or later, China will open up again.
Farfetch achieved its first year of profitability in 2022, so the growth story is on track, and the future remains bright. Mr Market has hit some of the strongest internet stocks this year, and Farfetch hasn’t been immune to that pessimism. The company’s price-to-sales multiplier has fallen 80% over the past year, from 10 to 2. When the market rediscovers its optimism, that SaaS stock will rise a lot.
Why did you make trade?
This was the case of two stocks that have experienced sharp declines over the past year and a half. In the case of Farfetch, my confidence remains as high as ever. In fact, I see adding posts at this low point as a bit of a no-brainer. With SmileDirectClub, on the other hand, my doubts started to increase. I remain optimistic about the company, in fact, and maintain a positive stock pick on CAPS. You have just decided to move the stock from real money holding to watch list status.
It’s entirely possible that SmileDirectClub will increase 1000% after I sold the stock. (It’s happened before!) But I did this trade because Farfetch also has a huge potential upside in these prices, and I think it’s a safer choice on the downside.
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John Mackie, CEO of Whole Foods Market, an Amazon company, is a member of The Motley Fool’s Board of Directors. Taylor Carmichael He has positions at Amazon, Farfetch Limited, and Shopify. Motley Fool has and recommends positions at Align Technology, Amazon, Farfetch Limited, and Shopify. Motley Fool recommends the following options: long January 2023 calls at $1,140 on Shopify and short January 2023 calls at $1,160 on Shopify. Motley Fool has a profile Disclosure Policy.
The opinions and opinions expressed here are those of the author and do not necessarily reflect the views and opinions of Nasdaq, Inc.