Seeking Alpha

Fiverr: Ready For Takeoff

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About: Fiverr International Ltd. (FVRR), Includes: UPWK
by: Parth Patel
Parth Patel
Long Only, Growth, Research Analyst, Tech
Summary

Freelancers earned $1.2 trillion in 2020 and contributed to 5% of U.S. GDP.

As the shift to remote work fuels the growth of freelancers, Fiverr looks to take on a $100bln TAM.

Fiverr takes the traditional job search process and puts freelancers in charge; this can play as a competitive edge in taking on the fragmented but growing market.

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Editor's note: Seeking Alpha is proud to welcome Parth Patel as a new contributor. It's easy to become a Seeking Alpha contributor and earn money for your best investment ideas. Active contributors also get free access to SA Premium. Click here to find out more »

Investment Thesis: Covid-19 has created massive tailwinds for the freelance economy and Fiverr (FVRR) is in a position to be a major beneficiary. Fiverr's stock price has soared 700% YTD but only sits on a $6bln market cap compared to its $100bln TAM. Fiverr differentiates itself in a highly competitive and fragmented market by countering the traditional job search process and putting freelancers in charge. If Fiverr can leverage this and successfully penetrate the small-medium businesses (SMBs) market, I see Fiverr capturing a significant portion of the TAM representing 100-300% upside from current levels within 3-5 years.

The Gig Economy

The gig economy consists of independent contractors, temporary workers, and contract workers where workers possess a high degree of autonomy, are paid by tasks, and maintain short-term relationships between themselves and their clients.

Freelance Forward: 2020, an annual study conducted by Upwork, reported that freelancers contributed $1.2 trillion to the U.S. economy in 2020, representing 5% of United States GDP and a 22% increase since 2019. The total number of freelancers increased to 59 million, or 36% of the American workforce, compared to 57 million in 2019.

Source: Upwork

The pandemic has forced society to adapt to remote work and many have shifted to freelancing. 75% of those who started freelancing post-pandemic say it has made them a more productive worker and they'd prefer working remotely over returning to a traditional office.

The same study in 2019 found that the percentage of part-time freelancers has fallen 15% since 2014, yet the percentage of full-time freelancers and full-time employees who freelance for supplemental income increased by 11% and 6% over the same period, respectively. This shows an increasing number of part-time freelancers shifting over to full-time freelancing or continuing to freelance while working a traditional job.

These statistics are for the United States; however, freelancing isn't limited to any geographic area or industry.

Source: Upwork

Based on a report by McKinsey Global Institute (MGI) in 2016, independent workers within the US and EU-15 represent around 20-30% of the working-age population or 162 million people. Of those 162 million independent workers, 150 million provide labor as a service, yet only 6%, or 9 million people, provide their labor services through digital platforms. This represents a market opportunity for a company like Fiverr who provides freelancers a platform to sell their digital services to individuals and businesses. Source: MGI

In addition to those already classified as independent workers, there are 232 million inactive/unemployed/part-time workers across the US and EU-15 and at least 100 million of those workers, would like to re-enter the workforce or increase their hours.

Those working traditional 9-5 jobs participate in independent work to supplement their primary source of income as well. According to MGI, 30-45% of those working traditional jobs would "more likely than not" join the independent workforce if they were able to pursue their preferred working style. This alone would result in the independent workforce increasing to 268 million (129 million in the US and 138 million in the EU-15).

Source: MGI

Fiverr

Fiverr solved the biggest headwind for freelancers which was finding clients. Fiverr transformed the traditional staffing model to mirror an e-commerce experience for buying and selling digital services which has created a mutualistic relationship between buyers and sellers in the marketplace. The differentiating factor between Fiverr and its competitors (Upwork, Toptal, etc.) is that Fiverr views freelancers as entrepreneurs instead of freelancers applying and bidding for jobs in traditional fashion. Fiverr offers freelancers resources to manage their Fiverr account like a business with Fiverr Learn, And.Co, ClearVoice, and workflow management & analytics tools.

The Business Model

Fiverr provides a platform for freelancers to provide digital services called "gigs." These gigs span across 300 categories and nine verticals including Graphics & Design, Digital Marketing, Writing & Translation, Video & Animation, Music & Audio, Programming & Tech, Business, Lifestyle, and Industries.

Fiverr generates revenue by taking a percentage of Gross Merchandise Volume (GMV), the total value of transactions ordered through the platform, called the take rate. This take rate is based on transaction fees and service fees. Service fees are generated from the resources Fiverr offers its freelancers to improve their business. Fiverr calls this model the Service-as-a-Product ("SaaP") model. This SaaP model has shown impressive growth with GMV up 37% YoY and revenue up 42% YoY in FY19.

The Moat

Counter-Positioning

Fiverr's ability to counter position itself in the world of online marketplaces for freelance services has created a wide moat. Most online freelance sourcing services offer the same boring search process as an offline freelance sourcing service. This process includes freelancers creating a profile, applying to employers' posts, and interviewing for the job. After the interview, the freelancer is forced to wait to hear back on whether or not the job was his. Fiverr does the opposite.

Fiverr treats freelancers as entrepreneurs. Freelancers promote their services, set a fixed price, and let the employers come to them. Fiverr offers the following services to ensure freelancers are well-equipped to manage their Fiverr account like a business:

  • Fiverr Learn and Fiverr Elevate: offer educational content on marketing, business management, graphic design, web development, e-commerce, photoshop, and more.
  • And.Co: offers invoice software for freelancers that streamlines invoicing, tracking, proposals, task management, and income and expense tracking into one place.
  • ClearVoice: provides freelancers with content and brand creation.
  • Seller Analytics: Fiverr's platform also provides sellers analytics on business operations to understand past performance and areas for improvement. This includes real-time feedback performance, timeliness of delivery, completion rates, and responsiveness.
  • Fiverr Pro: This was discussed above. This service helps increase the quality of work offered by freelancers in order to draw in higher quality demand from SMBs.

All these services allow freelancers to improve the quality of their offerings and earn more for their services as a result. This will attract larger buyers who need high-quality work and have higher budgets. This creates a flywheel effect where a higher-quality supply of freelancers attracts a higher-quality demand of buyers. As the quality of supply improves, buyers are more satisfied and likely to spend more. As the quality of demand improves, freelancers earn more and are motivated to continue providing higher-quality services.

Source: Fiverr Investor Presentation

Network Effects

Fiverr's proprietary algorithms provide a narrow moat for the company through network effects.

We leverage predictive AI technologies to recommend Gigs to buyers based on their purchase history and other activity on our marketplace. Our algorithm has been designed to handle rapid and continuous growth in search queries. Further, it is also utilized to improve the liquidity between supply and demand on our marketplace, ensuring that seller capacity and buyer demands are in balance. We are data-centric and rely on data from disciplined A/B testing, buyer and seller studies, and other sources to inform all of our decisions on new platform enhancements.

Source: Fiverr 20-F 2019

AI inherently implies network effects because as more buyers and sellers use the platform the algorithm can better personalize selections leading to improved buyer engagement and spend per buyer. However, the power of these types of network effects depends on the effectiveness of the algorithm.

I think repeat buyers representing 58% of revenue is a good measure of the effectiveness of the algorithm and its ability to increase the LTV of buyers. Higher LTV for buyers in combination with consistent growth in active buyers and spend per buyer will continue to drive revenue. In the most recent quarter (MRQ), Fiverr reported a 37% YoY increase in active buyers and a 20% YoY increase in spend per buyer.

Source: Author, data from Fiverr Investor Relations

Source: Fiverr 20-F 2019

Areas for Growth

Counter-positioning and network effects in a highly-competitive and fragmented market are crucial for Fiverr to continue its growth. Fiverr's growth has been accelerated with the shift to remote work but in order to sustain this growth Fiverr will need to focus on there following sources of long-term sustainable growth:

  1. International Expansion: Since the start of 2020 Fiverr has made substantial progress in its international expansion. Fiverr launched localized sites for people outside the United States. This started with localized sites for Germany and Spain and more recently Portugal and Brazil with plans to continue this expansion into Europe, Asia-Pacific, and Latin America.
    • Localization of their platform will allow a freelancer in Germany to communicate and transact with a buyer in the United States without any language barriers, improving both the buyer and the freelancer experience. Fiverr has already implemented additional payment capabilities to support foreign currency transactions and allow for payment in local currencies removing any FX risks for sellers.
    • Fiverr's buyers are predominantly from English-speaking countries but Fiverr's plan to expand into Western Europe, Asia-Pacific, and Latin America should provide a sustainable source of growth and geographic diversification for the topline and its user base.
  2. Going upmarket: Fiverr expects the total addressable market (TAM) in the United States alone to be $100 billion per year which has remained largely untapped. The majority of this market is expected to be held by enterprises and SMBs. Fiverr estimates there are 30 million SMBs in the United States alone compared to their current active buyers at 3.1 million which primarily consists of individuals and very small businesses.
    • Fiverr's approach to capturing the SMBs market has been through its go-to-market bottom-up strategy. This strategy involves targeting individuals and teams at small businesses which is expected to lead to growth in buyers through organic, non-paid channels removing the need for a capital-intensive sales team.
    • Fiverr has started offering services to accommodate larger projects such as Fiverr Business, in an effort to capture the SMBs market. Fiverr Business is a collaborative project management tool that seamlessly integrates the ability to find freelance talent. Fiverr Studios is a similar product but for freelancers. Fiverr Studios allows a group of freelancers to combine their unique skills and experience to tackle larger projects such as those needed by SMBs.
    • Fiverr also offers services for its freelancers to improve the quality of their work. These services include Fiverr Pro, Fiverr Learn, Fiverr Elevate, And.Co, and ClearVoice. Fiverr Pro is a service where freelancers are hand-vetted by Fiverr and determined to be "top talent." If a freelancer is approved to be of Fiverr Pro status, they can offer Pro Gigs which are required to be more thorough and expensive than a traditional Gig. This gives an opportunity for freelancers to provide higher quality work for higher pay and will attract SMBs with larger budgets and more complex projects.
    • Going upmarket and capturing the SMBs buyer segment will lead to higher active buyers and spend per buy which should translate to sustainable topline growth for the foreseeable future.
  3. Category Expansion: Fiverr recently added a 9th vertical to the platform called Industries. Industries include categories such as Gaming, E-commerce, Architecture, Book Publishing, Podcasting, Politics, Influencers, and Real Estate. As Fiverr adds more verticals and categories to its platform, it increases the TAM, enhances the buyer and seller experience, and lifetime value (LTV) of buyers. All these factors are important for driving long-term revenue growth and buyer retention.
  4. Technological Infrastructure: CEO Micha Kaufman considers Fiverr a technology company, not a staffing company. Therefore, Fiverr has continued to invest in its cross-platform interface and its proprietary AI technologies which allow for better personalization and recommendations for buyers to enhance the buyer experience. This investment in their proprietary technologies has proved to be effective with 58% of revenue contributed by repeat buyers in 2019 compared to 57% in 2018.

Fiverr's ability to maintain sustainable growth in the future depends on its ability to continue investing in these four areas. With many competitors offering similar services, Fiverr will have to rely on its moat to continue gaining market share.

Financial Performance

Fiverr's revenue growth has accelerated post-Covid with 88% YoY growth for the most recent quarter. Based on forward guidance, FY20 revenue growth is expected to be 75% YoY and CAGR for revenue since FY17 is 53%. Management will need to continue its investment in international expansion, selling upmarket, category expansion, and technological infrastructure to maintain revenue growth at current levels.

Gross margins have been strong at 83% MRQ compared to 79% for FY19. Fiverr has yet to report positive operating income due to its continuous investment in growth. However, accelerated growth in revenue and organic growth in active buyers in FY20 has resulted in an operating margin of -1.9% MRQ compared to -31.7% in Q3 FY19.

Fiverr posted its first FCF positive quarters in FY20 with $6.1m MRQ FCF representing an 11.7% FCF margin compared to -$3.3m FCF in FY19 over the same period. FCF excluding stock-based compensation (SBC) for Q3 is positive at $2.3m or 4.5% FCF margin.

Fiverr Financials

Source: Author, data from Fiverr Investor Relations

Competitive Landscape

As discussed earlier, Upwork (UPWK) provides a platform for freelancers to find work but based on the traditional job search process where freelancers have to bid for job postings. Upwork has also benefited from the pandemic-induced shift to remote work with revenue up 27% MRQ and FY20 guidance expected to be 88% YoY increase.

The growth in core clients hasn't been as impressive with 18% YoY in FY19 and 15.3% MRQ with 139K core clients compared to 37.2% YoY in FY19 for Fiverr with 3.1m active buyers based on Q3 FY20. (Important note: "Core clients" only represents clients who have spent at least $5,000 since the first purchase and have had spend activity in the past 12 months. Fiverr's "active buyers" represents anyone who has ordered a gig within the last 12 months.)

Fiverr vs Upwork: Growth in Buyers

Source: Author, data from Fiverr Investor Relations

Upwork reports a client spend retention metric which peaked at 107% in Q1 FY19 but has slowly drifted lower since with client spend retention at 100% MRQ. In the same period Fiverr managed to boost its spend per buyer by 30% to $195 from $150.

Upwork's Gross Service Volume (GSV) for FY19 was $2.1 billion representing 18.8% YoY growth and $686.1m MRQ representing 25% YoY growth. This compares to Fiverr's GMV of $401m in FY19 representing 37% YoY growth and $193.9 MRQ representing 85% YoY growth.

Even with nearly 5x the GSV of Fiverr, Upwork's take rate resulted in revenue of $300m in FY19 compared to Fiverr's $401m GMV resulting in $107m in revenue for the same period. This results in a take rate for Upwork of 14.6% and 27% for Fiverr based on FY19.

ChartData by

YChartsBoth companies have been reinvesting heavily into their business to take advantage of the massive TAM and have yet to turn a profit. However, Upwork reported an operating loss of $23m for FY20 through Q3 compared to an operating loss of $11.1m in FY19 over the same period. Fiverr reported an operating loss of $8.8m in FY20 through Q3 compared to an operating loss of $26.7m in FY19 over the same period. Both companies have seen accelerated revenue growth in FY20 but Fiverr has managed while increasing operating margins whereas Upwork has doubled its operating loss through three-quarters of FY20 compared to all of FY19.

The market for providing freelance services is fragmented with numerous different websites offering very similar services. This results in low switching costs for freelancers and buyers and fuels a competitive environment for Fiverr and its competitors.

Valuation

Fiverr is a difficult company to value given its high growth and few publicly-traded competitors. However, relative to Upwork Fiverr is quite expensive. Fiverr is trading at 37 times sales while Upwork is trading at 12 times sales. Fiverr's higher multiple compared to Upwork is justifiable given its performance relative to Upwork. Fiverr has maintained higher revenue growth, gross margins, and has substantially improved operating margins through FY20 relative to Upwork.

It's difficult to buy at these levels with Fiverr operating in a highly-competitive and fragmented environment and the fact that Fiverr hasn't yet brought significant SMBs to its platform. This is seen as both a risk and a growth opportunity for the company. Both Fiverr and Upwork combined for ~$10bln in market cap while FVRR estimates $100bln TAM in the US alone, or 10x the current combined market cap of both companies. With Fiverr's current growth combined with the growth of the freelance industry, buying Fiverr for 25x-30x sales is justifiable.

ChartData by

YCharts

Risks to the Investment Thesis:

  1. Failure to compete for the SMB market: If Fiverr cannot successfully get larger enterprises to buy from their platform it will significantly stunt their growth potential. Fiverr will be directly competing with Upwork, Freelancer, and Toptal for this market and the competition will be fierce.
    • Upwork, Freelancer, and Toptal currently provide larger enterprises with freelancers who are vetted and skilled for the desired task. Fiverr's attempt at providing a similar service is Fiverr Pro. Fiverr Pro helps perpetuate the flywheel effect discussed earlier but this can be disrupted if Fiverr can't reach SMBs to bring higher quality demand to match the higher quality supply (Fiverr Pro freelancers). Of Fiverr's 3.1m active users, a large majority of them are individuals and very small businesses, an important metric to determine the effectiveness of Fiverr's ability to reach the SMB market.
    • Successfully capturing the SMB market is the backbone to Fiverr's growth and the thesis. If there are signs of weakness in capturing the SMB market, the thesis has been invalidated.
  2. Unable to expand globally: With 70% of revenue coming from English-speaking countries in FY19, expanding across borders will be vital for the long-term growth of the company. Freelancing is a global trend not restricted to any one geographic area, and therefore an important source of sustainable long-term growth for Fiverr.
    • Fiverr's competition with Upwork, Freelancers, and Toptal knows no borders. Fiverr will need to continue improving the quality of work on the platform in an attempt to get SMBs to use their service both in the U.S. and globally.
  3. Disintermediation: This risk is inherent in the business model of any broker. Fiverr serves as the middleman for buyers and sellers. It's possible they decide to take their relationship off Fiverr's platform.
    • Fiverr's attempt at keeping freelancers engaged is by providing services to freelancers that help them manage their business. The main value Fiverr provides to freelancers is a marketplace to find clients. If this is disrupted with a more convenient way to provide the same service, it would be detrimental to the long-term potential of Fiverr.

Conclusion

The freelancing economy will continue to grow even after the pandemic subsides. Fiverr has positioned itself to take advantage of this opportunity by differentiating the job search process other platforms offer. This creates a flywheel effect that promotes high-quality buyers and sellers and drives the number of active buyers and spend per buyer. Fiverr's ability to take advantage of this flywheel effect lies in its ability to get SMBs to use their platform over its competitors. This will determine the durability of Fiverr's moat and the longevity of the company in a highly fragmented market.

Fiverr's success isn't guaranteed but I think the risk-reward under the circumstances is ideal. I see significant pullbacks in Fiverr's price as an opportunity to add to my position with a 3-5 year time horizon. I will be monitoring Fiverr's ability to attract SMBs over the next earnings release to see if my thesis holds.

Disclosure: I am/we are long FVRR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.