The gig economy is where large numbers of people work in part-time, temporary positions, or as independent contractors. With a mission to "change how the world works together", Fiverr (NYSE:FVRR) is capitalizing on the multi-billion dollar gig economy. Despite Fiverr's exceptional economics and industry tailwinds, is it worth it to own a piece of this business at the current valuation? In this article, I'll discuss why investors should take a small position in this high-growth business at its current price.
Fiverr is a digital marketplace that connects buyers and sellers of services. Similar to e-commerce platforms such as Etsy (ETSY), Amazon (AMZN), eBay (EBAY), and MercadoLibre (MELI), Fiverr acts as a middleman that connects people through its mobile app and website. Buyers use Fiverr's search engine and connect with sellers via its in-app messaging platform. Sporting over 550 categories of productized listing service listings known as "gigs", buyers are able to seamlessly search for and purchase services including logo design, video editing, web development, etc...
As a middleman connecting buyers and sellers, Fiverr primarily generates revenue through transaction fees and service fees. The image below depicts a typical Fiverr transaction.
In the example above, Fiverr's take rate is 5.5% of the transaction plus an additional $2 for purchases under $50. Like many middleman businesses, Fiverr is a capital-light business model that simply operates a marketplace rather than employing individuals. As a percentage of GMV, Fiverr's take rate was 29.2% in F'21. Fiverr believes this take rate is sustainable as it continues to benefit from network effects and further solidifies its value proposition to both its buyers and sellers.
However, Fiverr has created an ecosystem of value-added services for both buyers and sellers of the platform. The table below shows a summary of the different additional services Fiverr offers.
|Fiverr Workspace||Stoke Talent|
While the majority of FVRR's revenue is primarily generated through transaction fees, the "value add" services increase its potential to lock customers into the platform and increase a user's lifetime value.
As mentioned previously, the gig economy is where people work in part-time, temporary positions, or as independent contractors. According to Statista, there are approximately 1.1 billion on-demand gig workers worldwide. Moreover, it is projected that in 2027, about half of the U.S. population alone will have engaged in some type of gig work.
According to FVRR's investor presentation, the total addressable market is approximately $115 billion and US total freelancer income is an estimated $815 billion. Interestingly enough, Fiverr data portrays that the majority of freelancing happens offline, and compares it to e-commerce in 1994; in 1994, the majority of purchases were made offline (aka. retail).
In the last ten years alone, multi-billion dollar "marketplace" and "middleman" businesses have been created. Companies such as Uber (UBER), Lyft (LYFT), Airbnb (ABNB), and DoorDash (DASH), to name a few, all revolve around the gig economy. Uber and Lyft connect riders with drivers. Airbnb connects vacationers to homeowners. DoorDash connects restaurants to food delivery drivers to customers. All of the aforementioned companies were built and thrive off of the massive gig economy.
Data from Inuit (INTU) owned Mint exhibits a fundamental cultural shift within the working population. Below are some key statistics to show the cultural shift towards flexible working arrangements, particularly through members of Generation Z.
Based on the data above, it is clear that the gig economy is poised for exceptional growth and many are happy with the gig economy. The flexible working hours combined with a growing freelance workforce and greater adoption demonstrate the workforce shift we are experiencing today.
Like many who have read my articles in the past, I like companies with lots of growth runway ahead. While total addressable market (TAM) is not solely indicative of a company's success, Fiverr is an industry-leading freelance platform that, if managed correctly, can significantly increase its market share for years to come. The core drivers of Fiverr's revenue are its take rate and the growth of its active user base. The active user base is key - if users are not actually active on Fiverr, there are no benefits to the business. Fortunately, Fiverr has continued to increase its take rate and active user base on a YoY basis. The twin engines for Fiverr's revenue growth include growing their user base and spend per buyer.
Additionally, Fiverr has the potential to build a wide moat around its business if it pulls the right levers. First, FVRR is benefiting from network effects, in that the value of the platform increases the more users it has. In essence, more buyers of services can find more sellers offering services, which ultimately supercharges Fiverr's growth flywheel in the long run.
Second, Fiverr will benefit from high switching costs as it continues to incorporate value add products on the supply and demand side. In my previous article on ETSY, a key element of the investment thesis was sellers' reliance on the niche e-commerce platform that essentially creates a "lock-in" effect. Similar to ETSY, as sellers accumulate reviews, spend money on ads, and build up their client base, they will likely become reliant on the platform as a source of income, deeming it unlikely they will switch. Hence, FVRR must ensure it capitalizes on its growth opportunities and value-added services in order to prevent any churn and increase customer retention.
Amazon and ETSY are two companies that greatly benefit from buyer ad spend on their platform. While not a significant component of revenue yet, this is an opportunity FVRR can capitalize on if it pulls the right growth levers to expand its user base. Based on the freelance data mentioned above, the market is set for monstrous growth that will drive gig workers to compete with each other and differentiate their services. As competition becomes stiff, sellers will spend more on FVRR's Promoted Gigs service, and Fiverr will be the direct beneficiary resulting in high-margin advertising revenue.
As both a buyer and seller on Fiverr, I can attest to the seamlessness and simplicity of the platform. As a seller, I only did two jobs for fun (created PowerPoint presentation slides), and it took me an egregious 2-3 minutes to list my service on the marketplace and create an account. As a buyer, I have utilized the platform multiple times for photo editing and logo design. Simply search for the service you want, see a list of relevant gigs, and use filters if need be to sort through sellers. As a user, the E2E journey was extremely simple. From the first message to the final product, Fiverr's platform is extremely intuitive due to its in-house messaging and payments platform.
As of F'21, 70% of Fiverr's revenue is derived from English-speaking countries such as the US, UK, Canada, Australia, and New Zealand. The international opportunity for Fiverr to attract more buyers from across the globe is massive. Many high-skilled individuals in underdeveloped/developing countries can take advantage of Fiverr's platform to be compensated for their skills. For example, a seller in Pakistan can likely make more money on Fiverr by offering graphic design services to someone in North America than in their own country due to economic differences. Without Fiverr, the two individuals engaged in the transaction would have no way to connect with each other.
By providing value to both buyers and sellers, Fiverr has cultivated a loyal user base. In 2021, repeat buyers accounted for a whopping 59% of Fiverr's total revenue. Additionally, Fiverr's 20-F forms indicate that majority of buyer acquisition was fueled via organic growth through unpaid channels such as word-of-mouth marketing and referrals. We can see below that FVRR's net promoter scores (NPS) are high for both buyers and sellers. With plenty of user growth ahead, Fiverr can significantly benefit from economies of scale.
It seems as if all technology stocks have faced this risk recently, with stock prices declining back to reasonable levels. Fiverr is no exception, down 62% YTD and over 85%% from all-time highs. While COVID did supercharge growth and the markets have cooled, Fiverr exhibited excellent growth pre-COVID and should continue to experience double-digit growth for years to come.
In 2020 and 2021, Fiverr committed plenty of its capital towards acquisitions in hopes of fueling long-term growth. While acquisitions can be an excellent method of supercharging growth, they must be accretive and propel future earnings. Fiverr spent $95.9 million on the acquisitions of Working not Working, CreativeLive, and Stoke, all for cash. As previously mentioned, integrating complementary products creates a "lock-in" effect for sellers, enticing them to stay on the platform. Nevertheless, if FVRR's acquisitions do not result in improved long-term financial performance, the stock can suffer and deteriorate shareholder returns. The table below gives an overview of Fiverr's 2021 acquisitions and a brief description of each business.
|Acquisition||Description||Purchase Price Net of Cash (000's)|
|Working not Working||Creative talent platform for high-end vetted talent||$9,922|
|CreativeLive||Online learning platform to help freelancers develop professionally||$9,332|
|Stoke Talent||Freelancer management platform to help businesses manage freelancers across channels||$93,084|
While acquisitions are a risk, the three companies can add significant value to Fiverr's already strong business model. Specifically, Stoke Talent can further unlock the already growing demand for businesses to hire freelancers, with 80% of corporations planning on increasing the use of freelance and gig workers in the coming years.
In terms of competition, there are many companies taking advantage of the gig economy in different ways. Fiverr's direct pure-play public competitor is Upwork (UPWK), which essentially has the same business model as Fiverr. While Upwork is the largest freelance platform by GMV, the freelance market is by no means a zero-sum game with many major private players taking advantage of the growing industry.
A key difference between Fiverr and Upwork is the process by which freelancers charge for gigs. Upwork sellers typically charge a higher fee than Fiverr. Additionally, Fiverr's focus is more on one-time jobs whereas Upwork is geared towards longer-term projects. While Fiverr operates solely as a platform-as-a-service model, Upwork considers itself a hybrid between traditional staffing agencies and pure-play freelance companies.
Despite its lack of profitability, Fiverr has historically grown revenue at a high rate. In F'22, Fiverr posted just under $300 million in revenue, with over half generated from the United States.
Like many that benefited from COVID-19, FVRR's growth has slowed. As a result, their valuation multiples and market capitalization have contracted significantly. While high growth is essential to finding multi-bagger opportunities, FVRR is living proof that valuation still matters.
The chart above exemplifies the contraction in FVRR's price to sales ratio from a high of 56.55x to 6.556x. While the valuation has been corrected, FVRR is still not a cheap stock by traditional metrics.
While FVRR's valuation is still not cheap by traditional metrics, I believe today's price provides a good entry point for investors looking to initiate a position in this company. While excessive growth had clearly been priced into this company at $300+, it is evident that FVRR should've never been trading at a $10B+ market cap to begin with.
With slightly under $300 million in revenue and growing, Fiverr is worth slightly under $1.5B today in terms of market capitalization. As a growth-focused company with significant tailwinds ahead, Fiverr definitely has room to grow.
Despite Fiverr's still rich valuation, its strong business fundamentals and growing user base make it an attractive company to own. With the current bearish market sentiment, I believe a small position is a better solution that can be added to over time. All things considered, I will implement a buy recommendation for Fiverr. However, I will issue a word of caution that stocks such as Fiverr are not for the faint of heart. Investors should prepare themselves for volatility and be able to stomach the short-term pain.
Additionally, it is important for investors to keep the aforementioned company risks in mind; FVRR must ensure it can continue to deliver upon its growth strategy by acquiring new buyers, increasing spend per buyer, and capitalizing on the massive freelance market opportunity ahead. Despite the company's risk and valuation, as a young investor, I am willing to own a piece of this business with a 10+ year time horizon. Thus, I will be implementing a buy recommendation on Fiverr at its current price.
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Disclosure: I/we have a beneficial long position in the shares of FVRR, ETSY, ABNB either through stock ownership, options, or other derivatives. 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.