Overview
Fiverr (NYSE:FVRR) continues to show why it is one of the most attractive growth investment opportunities in the market today. The business has proven to be resilient during the COVID-19 situation as growth kept accelerating while efficiency improved.
Given its 44% growth in Q1, the performance exceeded our expectations. Since our most recent coverage on the company's promising move upmarket last November, shares price has appreciated by a staggering 170%. Moreover, the fact that the management has raised its full-year outlook during this time is also a demonstration of Fiverr's rare quality.
Catalyst
Beyond Q1, the combination of a less competitive advertising market and the company's core competence in online marketing will be the key catalyst for the business. Given that many typical big advertisers in travel and hospitality are facing COVID-19 related slowdown, Fiverr is very well-positioned to scale its performance marketing campaign at more attractive costs.
Unlike its equally interesting competitor in the gig economy, Upwork (UPWK), Fiverr does not use salespeople in its buyer acquisition strategy. Instead, it leverages online marketing such as SEO, online referrals program, and paid/performance-based marketing. As the company hones this skill over the years, sales efficiency and growth have consistently improved. Eventually, this strategy has also become the company's core competence.
(source: tikr.com)
With the gross margin at +79%, Fiverr's strong sales efficiency makes it look more like a SaaS rather than an online marketplace business. Upwork's overall gross margin, on the other hand, is at least ~1,000 bps lower. Growth has also been impressively steady at +40%. In Q1 2020, growth even reaccelerated to 42%, higher than that of the overall annual growth in 2019. Fiverr was able to grow active buyers by 17% YoY to 2.5 million in Q1 by actively improving its online marketing funnel.
(source: FB ads monitoring)
As we have briefly touched upon, the fact that big online advertisers are now slowing down indefinitely due to COVID-19 presents a solid opportunity for Fiverr to double down on performance-based marketing channels to drive growth. Based on our monitoring of Fiverr's ads placements on Facebook (FB) in the US region alone, the company has placed 490 ads on the platform for the last 90 days.
We also found that the company's ad placement activities have never slowed down in the last 30 and 7 days, which indicates that it has been scaling the campaigns due to the strong ROAS (Return on Ad Spend). On the other hand, doing this similar research on Upwork, returned only 200 ads. Fiverr has also been running similar ad campaigns in its fast-growing international regions such as Spain and France, where new buyers have increased by 60% and 30% consecutively. In these two countries, Fiverr has been running between 520 and 530 ad placements on Facebook platform in the last 90 days.
Risk and Valuation
There are no risk factors we see in Fiverr, aside from its seemingly high valuation at present. Given its latest market cap of ~$1.8 billion and 2019 revenue of ~$107 million, the company trades at an all-time-high ~17x P/S. Upwork, on the other hand, is trading at a single-digit P/S with a +20% growth expectation.
(source: stockrow)
As a result, there seems to be a little room for execution error, which we think will punish the stock badly if it were to happen in any of the following quarters. With that in mind, the strong execution and pandemic-proof business seem to be the ongoing narratives fueling the premium on Fiverr's valuation. While the COVID-19 situation has forced many companies to withdraw its full-year guidance, Fiverr's management has instead confidently raised its full-year profitability and revenue guidance. As it stands, we believe that the ~17x P/S may be fair enough for a consistent 40% grower with a path-to-profitability like Fiverr.
