It has been a treasure-hunting time for battered growth stocks. After our previous article on Teladoc, this time round we would like to touch on Fiverr. We are trying to shortlist companies that have a proof of concept, a runway for sustainable growth and a sound business model.
Fiverr is a platform that connects freelancers with business owners looking for services in various digital projects, including website design, content writing, and voice-overs. In recent times, even artificial intelligence and data analytics is added to their portfolio of services. Their main competitor would be Upwork and Freelancer.com.
Growth of the Freelance Market
According to a report by Growth Market Reports, the online market was valued at USD 5.1 billion in 2022 and is expected to reach USD 18.3 billion, expanding at a CAGR of 15.1% by the end of 2031.
The market growth is attributed to the rising adoption of freelance platforms by established companies around the world increasing the talent pool for businesses and providing secured jobs and payments to freelancers.
Source: Fiverr Investor Deck
There is a huge addressable market for freelance services of 247 billion US dollars just in the US and we have not touched the other parts of the world yet which Fiverr have a foothold on. To put things in perspective, Fiverr’s revenue for 2022 is just 337 million US dollars.
What is Going Well?
With the world moving more into an open work concept where freelancers and remote working could be part of the human resource set-up. Adding on, the migration of traditional freelancing activity to the online world is just in its infancy with a good growth runway. The prospect of Fiverr’s business model as a platform marketplace for freelancers and employers looks sustainable and viable.
Source: Fiverr Investor Deck
Also, Fiverr has one of the most recognisable brands in the freelance marketplace. Their bigger competitors are Upwork and Freelancer.com. Their growth metrics such as active buyers and spend per buyer have also been on a good upward trajectory. The average spend is 262 dollars which is lower than their main competitors as Fiverr clients are usually acquiring a one-off service rather than on a long-term project basis.
Source: Fiverr Investor Deck
Fiverr has also been actively increasing its categories of services by adding in-demand sectors such as Artificial Intelligence and Data Analytics that are in demand. The geographical outreach is also part of their growth plan with localized marketing initiatives in Germany, Australia, France and the UK.
Personal User Experience
On a personal note, we have been a client of Fiverr and Upwork, so here are our thoughts on our experience. For those who are keen to check out the Fiverr service, you can click on this link (Our affiliate link).
For Fiverr, we have used it for designing our website logo, improving the speed and doing some editing work. As for Upwork, we did try to do some editing work there. On the whole, we feel Fiverr is more user-friendly with easier engagement and prices are generally more reasonable.
However, the quality of work from the lower end of the spectrum in terms of freelance fees is going to be a hit-and-miss affair. Nonetheless, for a small business owner, the ability to outsource tasks to a huge pool of freelancers is going to aid greatly in achieving their business goals. The amount spend on Fiverr is also much lesser than Upwork as the scope of work would be more aligned with small projects rather than large-scale projects.
To counter this, Fiverr launched Fiverr Business in 2020 and is a verified freelancer place to target corporate clients- it would be similar to Upwork.
Fiverr’s normal marketplace also has the Fiverr Pro category which is a verified professional that could charge a higher rate and likely going to come up with better quality works.
Also, from the table below, we could see how Fiverr generate revenue. There would be a 20% cut off the total amount paid to the freelancer for their services. Fiverr will also charge the buyer of the services an additional 5.5% service fee.
The table below summarises the main differences between Upwork, Fiverr and Freelancer.
Source: upsilonit.com
Valuation
| Stock and Price | Market Capitalisation | P/E | Price to Cashflow | Current Ratio | Debt to Equity | Price to Sales | Price to Book | Forward PE |
| Fiverr- $26 | 984 Million US Dollars | Nil-Loss Making | 27 | 3 | 1.64 | 2.85 | 3.47 | 20 |
Source: Morningstar.com
The financial ratios of Fiverr seem to be more grounded after the recent trouncing of growth stocks. Nonetheless, they are not exactly a value play where it is still incurring a net loss as of FY2022. However, a check on yahoo finance and guru.com seem to imply they might turn the tide for FY2023 with a forward PE of 20. I am not sure if they are looking at the adjusted EBITDA- that is a wrong approach as net income should be used- which might not have factored in the dilution from the generous share-based compensation. The management’s expectation is 48 to 56 million dollars on an adjusted EBITDA basis for FY2023.
Debt Level
The debt level looks worrying at a debt-to-equity ratio of 1.64 but their existing cash and short-term investments amount to 460 million which is able to cover the whole debt in the form of convertible notes that is also in the tune of 460 million dollars. If their short-term investments are in treasuries, they could generate decent returns with the recent rise in interest rates.
However, a check of their Annual Report 2022, shows almost 90% (390 million dollars) of their marketable securities are invested in corporate bonds and we were not able to find details of the bonds they are vested in.
Their convertible notes are at 0% interest and expiring in November 2025. The chances of likely share dilution are low as their conversion price is $213, compared to the current price of $25.
Financial Health
Source: macrotrends.net
With a current ratio of 3 and generating positive operating cash flows since 2020, the strain on their short-term finances should not be of utmost concern and looking solid at this juncture.
Therefore, looking at the overall financial ratios, there are no huge red flags.
What is Worrying?
We do have our concerns as we did our research. There are two key elements, namely, growth in revenue and share-based compensation.
Slowing Growth in Revenue
Despite the bright narrative painted, Fiverr seemed to have hit a plateau as their growth expectation for 2023 is just 8% growth in revenue. This is a company that is growing at a compounded annual rate of 47% in revenue from 2017-2022. Therefore, based on the lacklustre growth rate forecasted, is it a sign of consolidation or things turning south? We certainly hope it is not the latter and it could be just consolidating after a great growth spurt due to the pandemic.
Stock-Based Compensation
Source: macrotrends.com
Also, as with all technology companies (the same situation for Teladoc), their share-based compensation is a deep concern for us. We could see an exponential increase from 2020 onwards. With a change in the recent technology talent landscape, where there have been lots of retrenchment, we hope the share-based compensation could drop drastically. This is so because there could be less need to hang a huge carrot in order to get talented tech-savvy staff.
Source: Fiverr Investor Deck
If share-based compensation comes down to a more realistic level, Fiverr would be generating net income. For Q1 2023, they would have a net profit of 12 million if we do not factor in the share-based compensation. This is an area we would be keeping track of when we revisit our investing thesis. We could see a slight fall (18 million to 16.7 million) in the compensation but we feel there is more room for it to reach a more reasonable level.
Charting Angle
Source: Investing.com
Fiverr is currently trading near the lower end of its price range since 2020 when at its peak, it was trading at the $335 level. For those who believe in the growth story and business model, this is an optimal level to accumulate the stock.
If their revenue growth starts to move to the 20ish region and they start to generate sustainable profits, the upside of Fiverr would be something to look forward to.
Summing Up
Fiverr has dropped to near its IPO price of $21 in 2019, we feel that it is a good time to do due diligence on the stock as we are a satisfied user of their services- affiliate link. The whole workflow process was seamless. The quality of the services has not led to us demanding a refund yet and for some, it has been really great as we have given our service providers a 5-star rating.
The growth of the business model seems intact as just a small portion of freelancing work has been migrated online. There are also good initiatives implemented for the company to keep innovating to suit the changing human resource landscape. The tailwind of remote working and hybrid human resource structure should be a catalyst for further growth runway.
Valuation-wise, they are also trading at more grounded levels that are not in a bubble zone. There are also signs of them turning in actual net profits in the near term. Financial strength through our analysis is also looking fine.
However, the recent forecasted growth in revenue of just 8% and their generous share-based compensation are concerns that we have. We would be keeping track of developments in these 2 areas when we revisit our investing thesis.
The current price is near the lower end of its trading range since its IPO. We find current levels to be attractive levels to accumulate this stock for those who have faith in the growth and business model of this well-known freelancing platform.
Disclaimer:
The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment or a recommendation to buy or sell a security. The content is not directed to any investor or potential investor and may not be used to evaluate or make any investment. Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stockbroker or financial advisor.
