Freelancing was a growing trend before the pandemic, but now companies are even more willing to operate in a hybrid manner with remote workers, opening the door to millions of digital freelancers around the world. Fiverr (NYSE:FVRR) is one of the global leaders in this space, and I believe it has the brand, business model, and leadership to thrive over the next decade.
Fiverr is a global online marketplace that connects freelancers offering digital services to businesses and other individuals, with services including anything from graphic design and web development to illustration and translations; basically, anything that can be done remotely.
Its operating model is that of a classic online marketplace, such as Etsy (ETSY), Amazon (AMZN), or Airbnb (ABNB), whereby Fiverr charges a fee to both sellers (freelancers) and buyers (businesses or individuals purchasing the freelance services) who use Fiverr’s platform. One of the most impressive aspects of Fiverr is the amount it is able to charge buyers and sellers for using its platform. As the below slide from its latest investor presentation points out, for every $100 transaction on Fiverr’s marketplace, it makes $25.50 in revenue – that is an industry leading take rate, and the fact that freelancers and businesses are willing to pay these fees demonstrates the value that they get from being on Fiverr’s platform.
I have also been impressed by Fiverr’s ability to continually roll out new services & enter adjacent verticals, as this results in both TAM expansion and the ability to upsell existing customers. Originally Fiverr was just a freelancer marketplace for small jobs, yet over time it expanded with its Fiverr Business offering for larger companies and enterprises, giving bigger teams the ability to collaborate and transact in a seamless fashion with freelancers from around the globe.
The company has also expanded its offerings for sellers on the platform, with additional value-add products such as Promoted Gigs and Seller Plus which provide additional advertising capabilities and advanced tools for freelancers.
Other additional features that have been added include “I Speak”, which matches buyers & sellers who speak the same language & has improved local buyer and seller experiences, driving more repeat purchases. There is also Fiverr Workspace, a software solution that allows freelancers to manage invoicing, contracts, planning, and workflows with their clients (making their platform stickier? I think so!).
There is something else that investors often overlook with high quality businesses, mainly because it doesn’t show up in the financials (at least… not immediately), and that is brand strength. Whilst its main competitor Upwork (UPWK) may boast that it’s the “world’s largest work marketplace”, I think that Fiverr certainly has the brand advantage over them – it’s the first place I would think to go to if I were to offer freelance services. Fortunately, it’s not just me who thinks that, as Fiverr’s Q1 Shareholder Letter will confirm:
A recent U.S. brand survey conducted with Ipsos indicated that Fiverr is the strongest freelance marketplace brand in terms of both aided and spontaneous brand awareness. Our U.S. brand awareness is also growing fast, speaking to the effectiveness of our long-term continuous investments into our brand equity.
As with any business, if it is to become successful in the long run, it must have some durable competitive advantages – aka economic moats. The most substantial moat possessed by Fiverr is its network effect, and it’s worth highlighting that the Fiverr brand most certainly strengthens this.
Freelancing is a growing trend, and all these freelancers need somewhere to go to sell their services. With Fiverr being the most well-known freelance marketplace brand, and also one of the largest, it will draw in a lot of freelancers who specialise in digital services. This means that more buyers will want to use Fiverr’s marketplace due to the wider selection and greater pool of talent; more buyers lead to more freelancers joining as they have more people to sell to, and so on. It’s a virtuous cycle that has helped many online marketplaces grow in the past, and I believe it will continue to help Fiverr on its upward trajectory.
I also believe that Fiverr has shown a level of pricing power, which demonstrates the value that customers find in its platform – and also indicates that the alternatives are limited. If we look at Fiverr’s take rate (i.e., the percentage it extracts as revenue from each transaction), we can see that it has just been consistently growing. This means that either Fiverr is upselling value-add products to its customers, or it is taking a larger fee from its customers without increasing churn from the platform, both of which get a big thumbs up from me as an investor.
The main pure-play competitor in this space is Upwork, although these companies do have slightly different approaches: Fiverr generally specialises in connecting freelancers and buyers for one-time jobs, whereas Upwork looks to build long-term relationships between freelancers and clients. I would say that Fiverr is more of a pure online platform, but Upwork is almost a mixture between an online marketplace and a traditional employment agency, giving off more of a ’LinkedIn’ vibe.
The freelance trend is certainly not a ‘winner-takes-all’ situation, and so I think there are opportunities for both Fiverr and Upwork to thrive. Yet it is Fiverr that appeals to me the most – whilst I appreciate Upwork’s focus on larger customers, the financials of these two companies speak volumes about their business models. Not only has Fiverr been growing revenues at a faster rate, but it is doing so whilst generating much stronger gross margins and industry leading take rates.
We are still in the early innings of a trend that is likely to grow for years to come – freelance work. As such, it’s no surprise to see that the platforms enabling this growth (i.e., Fiverr) are also expected to grow rapidly. According to Orbis Research, the Global Freelance Platform market is expected to grow at a CAGR of 15.3% from 2021 through to 2026, driven by an increased adoption of hybrid employee models comprising of regular full-time workers and a bunch of freelance workers, which also aligns with the current work-from-home model. This 15.3% CAGR would see the Global Freelance Platform market size grow from ~$4.5 billion in 2021 to ~$9.2 billion in 2026.
Whilst there are numerous companies on a local level, very few have the global reach of Fiverr, and its network effect should prove a real competitive advantage against its smaller, local competitors. Based on the approximate 2021 market size of $4.5 billion, Fiverr would currently have a market share of ~6.6%, cementing its place as one of the global leaders & only strengthening the network effect further.
Outside of this platform-specific forecast, Fiverr states its total addressable market to be a $115b opportunity, equating to ~364x revenue for the last 12 months. It appears to have taken into account only the opportunity within the US, and based on the occupations most relevant to Fiverr – meaning that this could actually be a fairly realistic TAM, particularly compared to some of the other numbers out there (Upwork believe its TAM to be $1.3 trillion…).
When it comes to fast growing, disruptive companies, I love to see founders of the company still involved in leadership – this is what we have with Fiverr, as their CEO is also their co-founder, Micha Kaufman. Also, as a side note, the other co-founder was Shai Wininger, who later went on to co-found Lemonade - another stock I own and have high hopes for. Kaufman is a serial entrepreneur who founded and led several technology companies before Fiverr.
One of the bonuses we get as shareholders from founder-led companies is that the leaders of these businesses often have some skin in the game, and Fiverr is no exception. Kaufman beneficially owns ~6.4% of Fiverr shares, meaning that his incentives will most certainly be aligned with shareholders. This can often result in CEOs that run companies with a long-term vision, and who don’t prioritise short-term results.
Furthermore, if you were a shareholder that has felt pain from Fiverr shares falling >85% from their 2021 high, you can rest assured that the CEO was feeling that pain himself, and he will be even more determined to turn that share price around.
Finally, a quick look on Glassdoor shows us that Fiverr gets great scores from its employees. Anything over 4 stars is impressive, so an overall score of 4.3 with a high score on Culture & Values gives me confidence in the internal culture of this company. Glassdoor isn’t a perfect measure by any means, but it’s the best we have!
I have always been very impressed by Fiverr’s financials, even though it remains an unprofitable company. It has seen strong revenue growth over the past few years, and with gross margins above 80%, this has the financial profile of a company that could become hugely profitable as it scales up.
It’s not all good news; EBIT margins are negative, and debt has started to become higher than cash (although I should point out that most of the debt relates to convertible notes, and so it is more likely to result in shareholder dilution in the future rather than anything else). Thankfully Fiverr is free cash flow positive, which means it can sustain its own business activities without requiring external funding – as long as employees remain happy with stock-based compensation boosts to their salaries, but that’s a whole different conversation.
As with all high growth, innovative, disruptive companies, valuation is tough. I believe that my approach will give me an idea about whether Fiverr is insanely overvalued or undervalued, but valuation is the last thing I look at – the quality of the business itself is far more important.
I believe that I have taken a conservative approach to this valuation model where possible. Starting with revenue, I have assumed 18% growth YoY for 2022. It’s worth noting that management initially guided for 25-27% YoY growth for 2022 after releasing Q4’21 results, but updated that to 16-23% growth following their Q1’22 results due to macroeconomic uncertainty. My assumption falls at the lower end of their updated guidance, and I have also assumed lower growth of 15% in 2023 in case the macroeconomic situation fails to improve. From 2024-2026, I have forecast a recovery in revenue growth for Fiverr to between 18%-20%, although I believe it could grow at a much more substantial rate.
I have also assumed that free cash flow margins will gradually improve from 12% to 17% as Fiverr continues to scale up, and I do not foresee any substantial increases in capex spend. I have assumed that there is additional dilution of shareholders over the 5 year period due to stock-based compensation expenses, increasing shares outstanding by just under 16% over this period.
Finally, an EV / FCF multiple of 32.6x is used in the final year, as I believe this would be appropriate for a company with Fiverr’s growth potential and free cash flow margin. I have also included low and high case scenarios based on different multiples, but the medium scenario would result in a 20% share price CAGR over the next 5 years.
The most significant risk I see for Fiverr is more of a macroeconomic risk; firstly, there’s the impact of a slowdown in the economy, as this may disproportionately impact small businesses who use freelancers on Fiverr’s platform. There’s also a risk that, as the world opens up again, companies begin favouring freelancers (or contractors) that can work in-person, rather than outsourcing work to a remote freelancer.
Another risk to Fiverr is competition, and I see this primarily from Upwork as the closest large competitor to Fiverr. Whilst Upwork is not necessarily encroaching on Fiverr’s territory, Fiverr is certainly trying to encroach on Upwork’s by targeting larger businesses. If Fiverr struggles to compete with Upwork, then it will dent its future growth prospects – I have currently seen no signs of this playing out.
Finally, there is a risk when it comes to low switching costs; in theory, after their initial project, freelancers and businesses could circumnavigate Fiverr’s platform and come to an external agreement, thereby reducing the fees paid to Fiverr. Again, there is little evidence of this playing out so far, and it’s important that Fiverr continues to add features (such as Fiverr Workspace) that increase customer stickiness & gives them a reason to transact through Fiverr’s platform.
In short, I believe that the trend of digital freelance work is still in its very early stages, and that Fiverr will become the leader in the industry. Whilst it may face some short-term headwinds, I think the long-term thesis remains very much intact, and so this current fall in share price looks to me like a fantastic opportunity.
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Disclosure: I/we have a beneficial long position in the shares of FVRR, UPWK 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.