Market-Implied Outlook For Fiverr Is Bearish But Analysts Remain Bullish
Summary
- FVRR is down 32% over the past six weeks.
- The Wall Street consensus price target has not fallen as rates rose.
- The Wall Street consensus target implies a 41% 12-month price appreciation.
- The market-implied consensus outlook is bearish.
- My final rating is neutral.
Fiverr (NYSE:FVRR) provides a platform to match freelancers with projects. The platform has over 500 categories of projects, ranging from voice-overs to tutoring and graphic design. As the gig economy grows, Fiverr and competitors such as Upwork (UPWK) have enormous potential as clearinghouses for jobs.
Fiverr’s revenue for 2020 was up 77% vs. 2019 and there were 3.4 million active buyers on the Fiverr platform by the end of 2020. And, of course, the beauty of this type of business is that incremental growth is low cost once the infrastructure is built out. In addition, a site like Fiverr enjoys strong network effects. As more people use the service, the company becomes more valuable.
YTD price history and basic statistics for FVRR (Source: Seeking Alpha)
FVRR closed at a high of $323.10 on February 12th. Today, the shares are trading at $219, a decline of about 32% since February 12th. February 12th was also a peak close for the QQQ, from which it has declined 4.9% to today. Many fast-growing tech firms have seen their shares drop substantially over this period. Teladoc (TDOC), for example, has declined about 38% over this date range.
The decline in these types of firms is largely due to the rise in interest rates because these (fast-growing) stocks effectively have long duration in terms of realized future earnings (also see this article). To put this differently, the net present value of earnings in the future is lower as interest rates rise. Stocks such as FVRR, for which the value is overwhelmingly based on future earnings relative to current earnings, will be more sensitive to interest rates.
10-Year Treasury yield over the past 12 months (Source: CNBC)
The challenge for investors, of course, is how to value companies that are young and growing very quickly. For a compelling summary of the fundamentals, see this article by SA author Michael Wiggins De Oliveira. My contribution to the discussion is a meta-analysis, trying to figure out what can be learned by analyzing the opinions of the analysts and the market-implied opinions of traders.
Wall Street Analyst Outlook
eTrade’s Wall Street analyst consensus combines the rating and price targets from 8 ranked analysts who have updated or affirmed their views in the past 90 days. Their consensus rating is bullish and their consensus 12-month price target is $309.13, 41% above the current price.
This price target does not look quite so aggressive in light of the fact that the stock was trading above this level only six weeks ago. Given the high sensitivity of the valuation of a stock like FVRR to interest rates, this consensus of price targets over the past 90 days may be somewhat stale in light of recent interest rate increases (which would lower the stock’s fair value).
Wall Street analyst consensus rating and 12-month price target for FVRR (Source: eTrade)
Seeking Alpha’s consensus of 9 analysts who have established or affirmed outlooks over the past 90 days is also bullish, with a price target that is essentially identical to e-Trade’s.
Wall Street analyst consensus rating and price target for FVRR (Source: Seeking Alpha)
Knowing that the prices of high-growth stocks are sensitive to interest rates, it is notable that the consensus price target for FVRR has not declined as interest rates have increased over the past year. I am not sure what to make of this, except to conclude that the analysts’ consensus expected growth has increased so much as to offset the effect of rising rates on the valuation of the stock.
Wall Street analyst consensus price target over the past year (Source: Seeking Alpha)
I am increasingly cognizant of the challenge of accounting for the relationship between analyst price targets for high-growth stocks and interest rates when rates have the potential to change quickly (as in the current environment).
Market-Implied Outlook
It is valuable to compare the consensus of analysts to the market-implied consensus of traders represented by options prices at a range of strikes. For those who are unfamiliar with the concept of market-implied (aka option-implied) outlooks, please see my overview post, which includes examples and links to references in the finance literature and an implementation by the Federal Reserve Bank.
In brief, the prices of call and put options at different strike prices represent bets on the probabilities of specific outcomes between the current date and the options’ expiration date. It is possible to calculate the probabilities of all possible future returns that would reconcile the options prices, a probabilistic outlook for price return. This is charted as a probability distribution, with probability on the vertical axis and return on the vertical axis.
I have analyzed options expiring on January 21, 2022 to generate a price return outlook between now and that date, the next 9.7 months.
When I chart the market-implied outlook, I rotate the negative return side of the distribution about the vertical axis to make it easier to see the relative probabilities of positive and negative returns of the same magnitude (see my overview post if this is not clear).
Market-implied probabilities of price returns for FVRR from now until January 21, 2022 (Source: author’s calculations using options quotes from eTrade)
The market-implied outlook is bearish, with substantially higher probabilities of negative returns than positive returns of the same magnitude for returns in the range +/-70% (the red dashed line is well above the solid blue line for the range from 0% to 70% on the horizontal axis). The single most-probable price return over the next 9.7 months is -34% (the highest probability value on the chart corresponds to 34% for Negative Return, -34%). The median price return is -13.8%. There is a 60% probability of having a price return less than or equal to zero for this period.
The market-implied distribution of returns has high positive skewness, which is expected for high-growth stocks. Investors buy the stocks in order to own the potential future upside and not for current earnings. There is an elevated albeit low probability of extremely high positive returns (100%-160%).
The annualized volatility derived from this distribution is 63%. This is a high volatility for an individual stock.
Summary
Fiverr is a market leader in the gig platform space. Low and falling interest rates and COVID-19, along with the long-term growth in freelance services and the company’s growing user base have all contributed to investors driving a massive increase in the stock price, up 719% in the past year. The Wall Street consensus price target for FVRR has increased by almost 9X over the past year. In the face of rising rates earlier in 2021, however, the stock saw a 32% decline in about 6 weeks. The consensus price target did not fall, however.
The Wall Street consensus is bullish, with a price target that is 41% above the current price. I am left wondering if we are seeing a lag in the analysts’ responses to changing rates and market conditions. The market-implied outlook for FVRR over the next 9.7 months is bearish, and the returns are highly positively skewed.
The estimated single most-probable price return over this period is -34% and the median is -13.8%. Given the disagreement between the analysts’ consensus outlook (bullish) and the market-implied outlook (bearish), my final rating is neutral. While there is a long positive tail in the market-implied outcomes (so we could see large upside to early next year), the odds favor a decline.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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