Fiverr Inc. (FVRR)
Fundamentals still intact.
Fiverr offers an online marketplace where freelancers come together to buy and sell services. The company takes a cut of every transaction made through the platform. The stock has fallen 70% over the last 12 months taking the market cap to under $3 billion. With the valuation multiple significantly decreased could this be the opportune time to pick up some shares.
Why Did Fiverr Stock Drop?
The drop in Fiverr stock has been sharp. It has coincided with a drop in valuations for a whole range of growth stocks from Peloton to Palantir.
Ultimately, the reason for the drop isn’t due to any major change in Fiverr’s business. The reality is that Fiverr stock, like so many others, simply became too expensive.
High growth stocks got caught up in a speculative mania in 2020 and 2021 pushing their prices up to unsustainable levels. When a unprofitable company like Fiverr trades at 20 times revenue you have to ask yourself if that is reasonable?
Historically, that is a very high valuation and a difficult hurdle to overcome. It’s only natural that the valuation should come down and that is what has ultimately reduce the share price of Fiverr.
Is the valuation reasonable?
With $41 million surplus cash on its balance sheet, Fiverr has an enterprise value of $2.62 billion at the time of writing. TTM revenue of $274 million gives the stock an enterprise value to sales of 9.56 times. Negative EBITDA of -$26.8 million means the company is yet to turn a profit. The company did report adjusted EBITDA of $7.3 million.
The hefty price to sales ratio is underpinned by strong revenue growth, 44.89% in 2018, 41.91% in 2019 and 76.99% in 2020. 2021 looks set to have been another strong year with 42% revenue growth reported in the third quarter.
Now that Fiverr stock has fallen -71% over the past year, the valuation has become a lot more reasonable. If we assume that Fiverr is able to grow revenues at 20% for the next 10 years then trade at 6 times revenue, the company would be worth around $8.5 billion in 10 years time. That would give an investor a 13.94% annualized return over that period. If Fiverr is able to grow revenues at 25% per year that pushes the expected annualized return up to 18.7%.
Thus, a key question is if Fiverr can manage a growth rate in excess of 20% per year and whether it will then trade at an attractive multiple. There are optimistic reasons to believe that could transpire. The business has seen tremendous growth in recent years and it’s marketplace is likely to thrive in the gig and digital economies.
Where will the business be in 10 years time?
Fiverr is set up to capitalize on the future of the digital economy. There is a growing trend of people wanting to run their own businesses. Solo entrepreneurs and small businesses both sell and buy Fiverr products which creates a certain stickiness. The key point is that Fiverr allows businesses to buy and sell services remotely and at an affordable price. This is all part of a major shift in the freelancer economy. The marketplace now offers a wide range of services from article writing, SEO, video editing, music, NFT art and more. Gigs can range from small $5 jobs to complex projects of $5,000 or more.
Nowadays it is easy for one person to run a whole business through the use of remote, online services. According to Mastercard, gig economy transactions are expected to grow 17% a year by 2023. Plus, the freelancer economy has continued to grow since COVID and is now a $1.2 trillion industry. The biggest competitor in this industry is Upwork, enterprise value of $3.1 billion. There is also competition shaping up in the form of LinkedIn Services. LinkedIn Services doesn’t seem to have caused much buzz and looks like it is targeting the higher end of the market.
Overall, this is not a stiff level of competition and Fiverr holds a strong position. It’s search traffic is higher than Upwork despite having a lower market value. However, the marketplace model has a relatively low barrier to entry and it would not be unusual to see another big player enter the market in the future.
The Fiverr model is unique because instead of employing freelancers by the hour you purchase jobs and then wait for them to be completed. Simplicity and good design has allowed Fiverr to develop a reasonably strong brand. Most people in the digital or freelancer economy have heard of Fiverr and the company generally holds a good reputation.
That said, a key risk for Fiverr is that once a job connection is made, freelancers can take their business private and thus avoid the Fiverr commission which is how Fiverr makes most of its money. Having said that, the Fiverr commission is low enough that most freelancers are happy to pay it in order to remain on the platform. Taking a client off platform has strict repercussions that can cause you from being banned.
Apart from brand, I don’t see Fiverr as having any other major competitive advantages. There may be some slim economies of scale and network effects but there is no clear monopoly that prevents other companies from entering the market. One thing Fiverr does have is a nice, clean business model. The company has no physical product to deal with nor does it have much need for customer service. Digital services and subscription products contribute to the strong profit margins of 83.1%.
Overall, I can see Fiverr becoming stronger over the next 10 years as the growth in the freelancer economy strengthens and work models continue to shift to remote, freelancer led work patterns.
Where is the alpha?
With negative EBITDA and less than $300 million in TTM revenues Fiverr stock is not particularly cheap at 9.5 times sales. Even after the shares have dropped 70% year on year, the stock trades at a higher multiple than it did pre-COVID. That being said, the multiple has come down hugely from its 2021 highs:
An investment in Fiverr basically requires a growth rate in excess of 20% in order to generate a meaningful return to investors. However, there are reasons to believe that Fiverr can achieve that.
Firstly, we have past evidence. Fiverr has grown revenues at an average of 59% over the last five years. Improving revenues, profit margins and net income all paint a positive picture of continued growth:
Next, we can see the Google Trends for Fiverr which is excellent and approaching all-time highs. While other companies are seeing a drop-off in the post-COVID period, Fiverr is still accelerating according to search data. I found that this trend was consistent across various territories:
Although search data looks good it does need to be balanced against web traffic which is showing a 12% drop off over the last 12 months:
Employee growth at Fiverr looks stable with 421 employees and 89 job openings. The Glassdoor rating is solid at 4.3 stars and a 91% approval rating for the CEO is also high. This is more than the 4.1 rating for competitor Upwork. You get the feeling that Fiverr is a more popular, well-rounded business than Upwork:
Short interest for Fiverr is surprisingly high at 14.6%. This is both good and bad. Good because a high short interest could theoretically lead to a short squeeze. Bad because it reveals some sophisticated investors believe the shares are heading lower.
The high short interest may well be a hangover from the period where Fiverr traded at a nosebleed valuation of 60 times sales. As the stock drops it would be sensible to assume that the short interest will reduce.
However, it could also be a negative take on the company’s financials. According to latest figures, operating expenses have grown more than 50% since 2020 while revenue growth has only grown 44%. The increase in expenses is split across R&D, sales and admin.
Many companies have been increasing their spend in the wake of low interest rates, frothy markets and online competition. Fiverr has been using the money to target new customers as well as translating its services for overseas markets. However, interest rate hikes will reduce the ease of corporate lending and if expenses continue to rise the stock will face an uphill battle to go higher. This will be an important metric to look for in the upcoming earnings.
So what is a reasonable valuation for Fiverr?
A $2.6 billion valuation leaves plenty of room for upside when considering the secular trends working in the company’s favor. Unlike the ultra competitive landscape of ecommerce Fiverr offers a ‘picks and shovels’ type play that serves the players of this growing trend. That said, Fiverr possesses no major competitive advantages and the company could face increased pressure in the future.
The valuation of 9.5 times sales is significantly down from the peak in 2021 of 60 time sales but is still higher than the pre-pandemic multiple of around 6 times sales. What’s interesting is that many of the stocks that have fallen in recent weeks have dropped due to elevated comps over the pandemic period. But Fiverr’s fundamentals appear to be relatively intact. Search trends are strong and we may not see any demand regression back to a pre COVID levels. We will know more following the next earnings report.
When considering the future of online work, the clean business model and the positive Google trends, Fiverr feels like a good investment at current levels. I would not be surprised to see Fiverr become a $10 billion company over the next 10 years which would provide an investor with a more than adequate return.
That said, I wouldn’t be surprised if the valuation multiple continues to drop over the next few months as the negative sentiment engulfing markets works itself out. Even so, I’m initiating a position today as I feel Fiverr is a good company to own for the next 10 years. Because the company is not yet profitable and because there is no clear moat this will be a small position for me. The stock could easily drop further because the valuation is not cheap.
This company feels like a good bet but it doesn’t feel like a ten bagger. I may increase or decrease the position following the next earnings report on 17th Feb.
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