- Fiverr reported a strong Q4 with revenue growing 89%, coming in nicely above expectations.
- Management provided 2021 revenue guidance of 46-50% growth and while this remains strong, it shows quite a bit of deceleration from 2020 growth of 77%.
- Recent rumors of LinkedIn entering the freelance space as early as September could cause increased competition in coming months.
- As the economy continues to reopen and more individuals rejoin the labor market, there could be overall less demand for freelance work.
- Valuation remains quite lofty at nearly 27x 2021 revenue.
Fiverr (NYSE:FVRR) reported a solid Q4 earnings in mid-February and their 2021 revenue guidance of 46-50% continues to demonstrate strong performance, albeit at a decelerating pace from 2020 levels (source: company presentation).
With a massive run-up in the name prior to Q4 earnings, it's no surprise the stock has retracted from the ~$320 highs and has moved towards $200. Despite the significant pullback, valuation continues to remain a little lofty at ~26.8x 2021 revenue, or ~15x my 2023 revenue estimate (assuming 30-35% growth in 2022 and 2023).
Fiverr is one of the leaders in providing a platform for freelance workers to connect with buyers. Given their software platform model, gross margins remain quite high at nearly 85%. The global pandemic caused the freelance and gig economy to rapidly grow over the past year as individuals who lost their full-time positions looked for alternative income.
The company has several growth opportunities in their near-term horizon, including continuing to build out their platform and content in addition to international expansion. While revenue growth could remain well above 30% for the next several years, the company is likely to face some increased pressures.
Competition continues to rise and with the potential for LinkedIn to become a direct competitor, freelance workers will have multiple platforms to work off of. In addition, the US labor force continues to improve as more individuals return to work, thus taking away potential freelance demand. More people are inclined to look for freelance work when they are not already pre-occupied with a full-time job.
There are likely going to be many winners in the freelance economy, and while Fiverr could be one of them, their valuation is already pricing in success.
Despite the near 35% pullback in recent weeks, I believe there could be continued downside to the name in coming quarters. As the economy reopens and workers re-enter the labor market, there will be less of a demand for freelance work. In addition, new competitors such as LinkedIn could move demand away from Fiverr, thus placing additional pressures on their business.
For now, I remain on the sidelines and wait for a better entry point, which could be closer to $150.
Brief Q4 Earnings and Guidance Review
With the company reporting Q4 earnings a little over a month ago, let's review some high level metrics. Revenue during the quarter continued to remain very strong, growing 89% to $55.9 million, beating consensus by ~$2 million.
Source: Company Presentation
Adjusted EBITDA margin came in at just over 8% for the quarter, pretty similar to last quarter's performance. The better than expected revenue led to EPS of $0.12, coming in $0.02 above consensus expectations.
Let's not forget, there continues to be a lack of corporate T&E expenses, given the global pandemic has caused a majority of companies to work from home. While these expenses are not directly broken out, we should expect to see some increased T&E expenses in coming quarters and years which will be a drag on margins.
Management also provided guidance for 2021, which includes revenue of $277-284 million, nicely above expectations for $259 million, and represents growth of 46-50%. In addition, adjusted EBITDA is expected to be $16-21 million, representing a margin of ~6.6% at the midpoint.
The company currently has 3.4 million active buyers on their platform, which grew 45% in 2020. This came at a time when the broader economy has shut down, and many individuals were left without work. Needing to replace their income, the rise of the gig economy became one of the bigger trends resulting from the global pandemic.
Fiverr also has the unique advantage of being one of the more well known freelance platforms in the market. Like many other technology companies, having the first mover advantage can be key to driving increase platform usage and a scaling user base.
Fiverr continues to post strong gross margins of nearly 85%, which gives them a lot of flexibility to invest back into their business. The below chart shows the company's marketing investment efficiency relative to their quarterly client's revenue cohort. The higher number demonstrates Fiverr's ability to generate incremental revenue relative to every marketing dollar spent.
Source: Company Presentation
During Q4, the company recorded a ratio of 1.1x, meaning they recovered their quarterly marketing costs within the three month window. This was the company's third consecutive which their quarterly cohort was above 1.0x, driven by their channel diversification, continued optimization improvement, increasing category offerings, among other drivers.
This also demonstrates the company's significant potential to grow their user base by investing in S&M. If they are able to recover their marketing expenses in essentially the same quarter, there is not a lot of risk. Thus, by potentially increasing their marketing spend, they have the potential to further scale their platform.
Management noted that 2021 priorities will be focused around strategic initiatives in addition to both demand and supply fronts:
Regarding our priorities for 2021: we are focused on continuing to execute on our strategic initiatives, that is going upmarket, international expansion, and building more value-added products and services as well as continuing to invest in our brand and marketing. You can expect us to continue to expand our upmarket coverage on both demand and supply fronts. (source: company presentation).
Expanding internationally is a significant opportunity for the company. As European economies continue to be in lock-down mode, individuals across the continent will be looking for jobs within the gig economy. As Fiverr continues to penetrate the local markets, they can provide content and catalogs that are more aligned with each individual country and region, thus providing a more attractive product for buyers and suppliers.
In addition to international expansion, this could potentially create a network effect. In other words, as more companies use Fiverr to post freelance opportunities and more consumers engage in the platform, the desire to use alternative platforms shrinks. If everyone is only using Fiverr, it makes it difficult for companies and users to become equally engaged in a competing platform.
Risks and Recent Developments
With management guiding 2021 revenue growth of 46-50%, they are already starting to see their growth numbers slow down. Yes, 2020 revenue growth was historically high, but 2021 begins to show some normalization in the business model. Over time, revenue growth will naturally decelerate due to the law of large numbers, though the optics of seeing revenue growth deceleration may cause some negative sentiment.
The number of active buyers grow 45% and reached 3.4 million. However, with the domestic US economy already showing signs of improvement and more individuals returning to work, it becomes incrementally more challenging to grow their user base. For example, as the restaurant and travel industries begin to recover, individuals who go back to work will become less reliant on freelance work and/or might not have the available time.
I believe this poses a real risk as there is the potential for a quick snap-back as the vaccine continues to roll out and states start to implement more relaxed social distancing requirements. Once the economy fully reopens and companies are able to expand their hiring efforts, the unemployment rate should continue to decrease, thus lowering demand for additional freelance work.
Just this past Friday, the US Bureau of Labor Statistics reported the US unemployment rate of 6.0%, and while this is down significantly from the April/May highs, this remains 250 basis points higher than the pre-pandemic levels in February. Again, this reinforces the risks that unemployment rate remains somewhat high and more individuals will continue to enter the labor force, thus potentially reducing the number of individuals looking for freelance work.
In addition, increased competition could make user growth and take-rate come under pressure. Fiverr's biggest competitor right now is Upwork (UPWK), and while Fiverr remains the clear leader, that doesn't mean that Upwork can't take market share over time. Freelancers will typically use multiple platforms to find work since there is not one centralized platform for all freelance opportunities. This means that there will likely be multiple winners, much like social media platforms have multiple winners (i.e. not everyone uses the same platform because Facebook has different offerings than Twitter and Snapchat).
More recently, Microsoft's LinkedIn is reportedly developing a new service called Marketplaces that allows users to find and book freelance work. This platform is likely to have a very intuitive user interface and is expected to have an in-house payment service. With this new offering expected to launch as soon as September, Fiverr (and Upwork) could be faced with a new significant competitor.
The LinkedIn homepage notes they have nearly 740 million members in over 200 countries. While this is not directly comparable to Fiverr's 3.4 million active buyers, it does show LinkedIn's scale and potential to massively disrupt the freelance market. With LinkedIn's platform already built to scale, it would not be terribly difficult for them to add a "freelance" functionality without massive investments.
Interestingly, the company recently debated launching a $700 million secondary offering. At the time of the announcement on March 2, the company's stock was trading around $280. However, just two days later, on March 4, the company pulled their offering as market conditions deteriorated with their stock trading down 25% to around $225.
I believe part of their reasoning for the secondary offering was to capture the benefit of the stock being near $300. The share dilution would not have been overly excessive, given the high share price. However, as the stock continued on their downward trend, the company would have had to offer an increasing amount of shares, thus diluting the current equity holders even more.
Over time, the company might need to access the equity markets to raise capital and with the share price continuing to face downward pressure, this may result in increased dilution at some point.
I wrote a bullish article on Fiverr in late December when the stock was trading just above $210. However, the quick rise up to nearly $320 pre-Q4 earnings turned me more bearish on the name. Since the company reported earnings, the stock is down nearly 35%, which I believe is largely due to the big run-up pre-earnings.
While the company's revenue growth trajectory remains very strong, the stock is currently pricing in solid execution, thus leaving additional upside a little difficult to justify.
Over the past year, Fiverr has continued to outperform Upwork given their stronger growth and larger market share. However, both stocks have pulled back in recent weeks as increased fears related to revenue growth decelerating and increased competitions have weighed on sentiment.
The company has a current market cap of ~$7.8 billion, and with ~$625 million of cash/marketable securities and ~$350 million of debt, the company has a current enterprise value of ~$7.5 billion.
For 2021, management is guiding revenue to $277-284 million, which represents 46-50% growth. Using the midpoint of guidance, this implies a current 2021 revenue multiple of ~26.8x.
Even if we assume revenue grows another 35% in 2022 and 30% in 2023, this could imply nearly $500 million of revenue, or a 2023 revenue multiple of ~15x. This seems to be quite an expensive multiple to pay for a company who will likely face increased pressure on active buyer growth as economies begin to reopen as well as heightened competition.
With the stock pulling back closer to $215, the current risk/reward seems to be favoring the downside for now. 2021 guidance has already been provided, and even if this ends up being conservative, the company will need to significantly beat expectations for the next several quarters in order to justify the expensive valuation.
For now, I remain on the sidelines and will wait for a better entry point, which could be closer to $150. I believe the stock could continue on their downward trend as investors re-evaluate high multiple stocks and digest potential increased competition, most notably from LinkedIn.
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