So you were lucky enough to have Afterpay Ltd (ASX: APT) shares this year.
According to my Fool colleague Sebastian Bowen, the stock has risen 244% so far this year and a spectacular 1,200% since the March COVID-19 trough. The price hit yet another all-time high on Monday.
Wonderful stuff.
But shareholders now have an absolute headache: when do you exit?
Yes, it's a great problem to have. But it's a problem nevertheless.
Can the buy now, pay later provider continue its rise, or should retail investors cash in their handsome profits before the dream is shattered?
There is a hint from the professionals on how to handle this.
Chloe Stokes, research analyst at Forager Australian Shares Fund (ASX: FOR) revealed last week she grappled with a similar situation.
"Farfetch Ltd (NYSE: FTCH) is a digital platform for the luxury industry. They operate on a global scale, including here in Australia," she told a Forager video.
"I've been interested in the business from a consumers perspective for a couple of years. I've ordered from the platform, and so have a lot of people that I know. The stock has been loosely on my radar for a year or two."
After watching the volatile share price and doing research on its business model, Stokes' consumer interest slowly converted to a professional one.
"It listed in late 2018 in September at US$27 a share – by December that year, it was trading below US$18," she said.
"It got down as low as US$7 in March this year. Of course, we wish we bought it back then, but we were looking at other things. In June, when it was trading at around US$20, we started to do some pretty deep research on the stock. And we started to get comfortable around the value that was in the business."
Forager ended up buying in the middle of this year for mid-US$20s.
Then it took off.
"Since then the price has run up pretty significantly… it's up more than 100% on our purchase price," said Stokes.
"COVID has been great for them, consumers are forced to shop online. And for somewhere like China, where they did a lot of their luxury spending internationally, they have been forced to find new ways to purchase those luxury goods. Farfetch has been a huge beneficiary of that."
Farfetch shares are now trading for US$60.08.
What to do with a pot of gold?
So what would Stokes' team do now that the price has rocketed up? Cash in or hold on?
Making the decision harder for Forager is that it thinks the company has excellent growth prospects in the future.
The revenue model for Farfetch has eerie similarities to Afterpay, in that the merchant – not the end customer – pays a fee to the platform.
How long would suppliers put up with this expense?
"You might think Farfetch is taking sales from those designer brands. And they're paying them, say, a 30% take rate for the pleasure," said Stokes.
"But if you look at it from another angle, Farfetch… is actually broadening the market for luxury goods, and especially for luxury goods online, because it's getting rid of a lot of constraints that those retailers would have had in their bricks and mortar stores."
Afterpay enthusiasts say the same – merchants lose margin but the buy now, pay later brings in additional sales that they would not have otherwise had.
"They are expanding the definition of luxury," said Stokes.
"Farfetch has two-thirds of its sales coming from millennials and Gen Z consumers… It's not just the fancy designer bags on there. There's expensive streetwear – you'll see pairs of Nikes on there."
Here's what Forager did
Stokes said she had many sleepless nights trying to figure out what to do with these now-inflated shares.
Her team ended up having their cake and eating it.
"We've sold more than half of what we initially bought in Farfetch. I think it's [now] down at a manageable position," she said.
"It is a brilliant business and one I want to own in the portfolio for a long time. I still think there's a lot of upside from here, although it's not as obvious as it once was."
Forager is an investment house based in Sydney. Its Australian Shares Fund is trading at $1.39 per share, which is 18% up year-to-date.
