Farfetch shares soar after $1.15 billion Alibaba, Richemont, Artemis investment

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The partnership between Farfetch, Alibaba and Richemont includes expansion in China

Farfetch/Alibaba/Richemont

Shares of luxury e-commerce retailer Farfetch Ltd. FTCH, +12.27% soared 11.1% in Friday trading after it announced a partnership with Alibaba Group Holding Ltd. BABA, +4.24% and Cie. Financière Richemont S.A. CFR, +8.89% that includes an expansion in the Chinese market and a $600 million investment.

Richemont labels include Cartier, watchmaker Piaget and fashion brand Chloé.

It was previously reported that an Alibaba investment in Farfetch would be coming.

Farfetch will launch shopping channels on Tmall Luxury Pavilion, Tmall Global and Luxury Soho, reaching 757 million consumers.

Read: Richemont jumps on results, Alibaba partnership

Alibaba and Richemont will invest $300 million apiece in Farfetch. The investment will be through the purchase of 0% convertible senior notes due 2030 issued by Farfetch. Alibaba and Richemont may require Farfetch to repurchase all or some of the notes on June 30, 2026 at full price.

Alibaba and Richemont will also each invest $250 million in a new joint venture, Farfetch China, taking a combined 25% stake. The two companies will also have the option to take another combined 24% stake in the venture after the third year.

These investments are expected to close during the first half of 2021.

“The Chinese luxury market – which is expected to account for half of global luxury sales by 2025 – consists of hundreds of millions of young, digitally-native consumers,” said Daniel Zhang, chief executive of Alibaba, in a statement.

Artemis, an investment company founded by François-Henri Pinault, chief executive of luxury fashion company Kering KER, +0.42%, has also increased its Farfetch investment by $50 million.

Also: Alibaba earnings beat expectations but stock still dips

Kering labels include Gucci, Saint Laurent and Alexander McQueen. Artemis is a controlling shareholder in Kering, and owns a range of other companies including Christie’s auction house and Chateau Latour vineyards.

“The new initiatives with Alibaba Group and Richemont extend Farfetch’s strategy to power the digital transformation occurring across the luxury industry, which has been accelerated by the unprecedented challenges resulting from the COVID-19 pandemic,” said José Neves, Farfetch CEO, in a statement.

All of the companies will join their efforts to further the Luxury New Retail initiative, which will create solutions including e-commerce websites and apps for luxury brands.

“The growth potential of luxury e-commerce has never been so promising, and the importance of China for the luxury industry is only becoming more obvious every day,” Pinault said in a statement.

The news comes as Amazon.com Inc. AMZN, -0.63% also plants a digital flag in the online luxury business with the launch of Luxury Stores, which rolled out with Oscar de la Renta on an invitation-only basis in September.

“With the strong fundamentals Farfetch has shown of late and the compelling opportunities from the China joint venture, Farfetch’s long-term growth opportunities are becoming more visible,” wrote Wells Fargo analysts in a note.

Moreover, Wells Fargo highlights the growth potential in the online luxury space.

“[D]emographics have been somewhat unfavorable for online adoption (due to an older customer base), but now that tech-savvy millennials are accumulating wealth, online penetration for the luxury industry should accelerate,” analysts said.

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Wells Fargo notes that the online luxury market could reach $112 billion in sales by 2025, up from $28 billion currently.

Still, analysts note that when travel resumes after COVID-19, luxury shoppers will likely return to stores, which throws into question how much online luxury shopping will continue to take place. This could hurt Farfetch.

Wells Fargo rates Farfetch stock equal weight with a $42 price target.

Farfetch stock has skyrocketed more than 300% for the year to date. Alibaba has gained 41.2%. And Richemont stock, which is up nearly 9% in Friday trading, has fallen 9.2% for 2020 so far.

The Amplify Online Retail ETF IBUY, +0.44% has surged more than 96% in 2020 and the benchmark S&P 500 index SPX, +0.00% is up 8.5%.