Fiverr International Ltd. Investment Thesis
In this report, I will cover the following:
Revenue and Margins
Stock Price History
Management and Ownership
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Fiverr International Ltd.
Sector: Communication Services
Market Cap: $8.2 billion
Fiverr operates as an online marketplace for freelance workers. Fiverr’s mission is to change how the world works together and helps freelancers in more than 200 categories find “Gigs”. On the opposite side of the coin, Fiverr helps potential customers find freelancers to perform a wide variety of tasks.
Finding the right talent, negotiating and contracting used to be a slow, difficult, and costly process; on Fiverr, it’s a seamless and intuitive browse, search, and click to order experience, with transparency and certainty on price, duration, and scope of work
Traditionally gaining good references and trust is hard and unreliable; on Fiverr, each Gig shows its transaction history, reviews, and a past work portfolio
Fiverr’s unique e-commerce platform provides freelancers with direct access to the global demand from buyers
Instead of spending a large part of their time and effort marketing and bidding on projects, Fiverr brings them customers without any effort on the freelancers’ part.
Once an order is placed, Fiverr provides freelancers with all of the back office tools necessary for them to manage and run their business in the most efficient manner.
How Fiverr Works
Fiverr’s digital freelancer marketplace allows it to address a massive market opportunity.
Fiverr is in over 160 countries, yet approximately 70% of revenue today is generated from English-speaking countries. The shift to an on-demand, online, and flexible workforce is a long-term global trend and international expansion presents a very large opportunity for future growth.
Fiverr’s customers comprise both buyers and sellers of freelance services. At the end of 2020, Fiverr had an active buyer base of 3.4 million representing 45% year-over-year growth. The annual Spend Per Buyer (SPB) at the end of 2020 grew to $205 representing a 20% increase year-over-year.
At the end of 2020, Fiverr had a net promoter score (NPS) of 67 for buyers and 79 for sellers (freelancers). A Net Promoter Score is the percentage of customers rating their likelihood to recommend a company, a product, or a service to a friend or colleague. The NPS framework suggests that above 50 is excellent, and above 80 is world class. Clearly, both buyers and sellers are satisfied with the customer experience. Ultimately, the platform is creating a positive feedback loop - buyers who come in to find a designer, can engage further services such as SEO, Marketing etc.
As the SPB suggests, Fiverr buyers are generally individuals. However, high-value buyers, classified as buyers with an annual SPB of over $500, continued to grow in 2020 and now represent over 58% of the core marketplace revenues.
Fiverrs desire to shift upmarket can be further demonstrated by the launch of Fiverr Business during 2020. Fiverr Business is a dedicated environment for business buyers to transact and collaborate and is already trusted by global brands including Unilever and L’Oreal.
Fiverr went public on the 11th June 2019 raising an initial $111 million through an IPO valuing the company at $650 million. As of 10th March 2021, the market market cap is $8.2 billion meaning if you had invested at the IPO date you would have over 12x your initial investment in less than 2 years. Despite this performance the company is still a small-cap company and very much a growth stock.
4. Revenue and Margins
Fiverr has been growing revenues at a phenomenal rate whilst maintaining its high gross margins. During its most recent financial results for the Q4 2020:
Revenue was $55.9 million, an increase of 89% year-over-year.
Gross margin was 83% compared to 80% in the same period last year.
This level of growth and margins is not a once off as Fiverr has a demonstrated track record when we look back over the last 2 years.
Management has also estimated Revenue for 30/03/2021 to increase by between 84% to 90% year-on-year.
5. Valuation Multiples
Fiverr is a growth stock and by its nature trades at high valuation multiples. As Fiverr is not yet profitable the P/E ratio is not a relevant valuation metric. Below are some of the key valuation metrics that I have identified
The valuation multiples for Fiverr have dramatically increased over the past year. The Price/Sales ratio had 6x in the space of one year with the share price having increased 10x during the same period. The recent market correction has had a positive impact on the Price/Sales and Price/Book ratios, improving them by over 20%.
6. Balance Sheet
Over $268 million in cash and cash equivalents
No inventory on the balance sheet which is not surprising given that this is an online company
Total Liabilities as % of Total Assets of 60%
Current Assets to Current Liabilities ratio of 4
Goodwill balance making up just over 1% of total assets which is insignificant and has not changed year-over-year
Convertible notes balance relates to a private offering in August 2020 of $400 million of 0% convertible senior notes due in 2025
7. Stock Price History
Having grown steadily in share price since its IPO the stock has been going from strength to strength with the most recent all time high in February 2021. As a result of the recent market correction in growth stocks, the stock trades below both the 50 day moving averages and is down almost 30% from the all time high.
The freelance market is very fragmented, diverse and competitive with a number of small competitors. The main competitor to Fiverr in this space at the moment is UpWork.
Arguably, Upwork and Fiverr are not true direct competitors because they have approached the freelancer market in separate ways. Upwork was formed through a merger involving a staffing firm named oDesk and a small business marketplace named Elance. As a result, Upwork has more of a root focus in acting like a staffing agency rather than building a freelance marketplace.
On Upwork, you post a job to attract freelancers. On Fiverr, freelancers can advertise their skills and specify the jobs they want to take on. Buyers can then search through the freelancers and decide who they want to work with. On Upwork, freelancers attempt to get chosen by bidding for jobs from employers, while a freelancer on Fiverr gets chosen by buyers based on how effective the freelancer is in selling their service. Upwork currently leads being more attractive to large employers involved in large projects but this might be about to change with the launch of Fiverr Business that I have mentioned above.
You may recall that I referenced Fiverr had a NPS of 67 for buyers and 79 for sellers. For comparison, UpWork has an NPS score of 32.
Based on the Full Year 2020 results, Upwork has reported double the revenue of Fiverr but Fiverr is growing significantly faster and with better gross margins.
9. Management and Ownership
Fiverr was founded in 2010 by Micha Kaufman and Shai Wininger. Micha Kaufman has served as the Chief Executive Officer and a member of the board of directors since inception. Shai Wininger served as Chief Technology Officer until 2014 before leaving to Co-Found Lemonade, the insurance fintech company.
Prior to co-founding Fiverr, Micha Kaufman founded and led several technology ventures, including Keynesis Ltd, Invisia Ltd, and Spotback Ltd. Kaufman has served as a member of the Advisory Board of Cerca Partners LP, a venture capital firm, since November 2016. Since August 2017, he has served as a member of the board of directors of Drove Network Ltd.
Micha Kaufman appears to be exceptionally well received at Fiverr with a 94% approval rating on glassdoor with the company overall scoring 4.5 out of 5 by its own employees.
In Micha Faufman, Fiverr meets my criteria of being led by a visionary founder.
Post Covid World
Fiverr has experienced tremendous growth over the past 12 months which has ultimately coincided with Covid. There is a risk that once the pandemic subsides, buyers may go back to using previous local freelancers instead of online. If this were to happen, the current revenue growth will not be sustained.
Shares trade at a Price/Sales ratio of 46. Even for a hyper-growth online company this is a very rich valuation. Despite having strong growth and gross margins, Fiverr is not yet profitable on the bottom line despite having positive free cash flow from operations. If the current revenue growth rates are not maintained the share price could suffer a further haircut.
Competition from LinkedIn
LinkedIn very recently announced that they are developing a new freelance marketplace platform which will enable businesses to find, connect with, and pay freelancers all on the platform. This marketplace would let its 740 million users find and book freelancers, pitting it against Fiverr. LinkedIn has got a big brand and as such the competition needs to be taken as serious. This does further reinforces the belief that Fiverr are onto something that has a huge total addressable market (TAM) if Microsoft (who own LinkedIn) are prepared to enter the ring.
Rise of the Gig Economy
During 2020, freelancers collectively earned $1.2 trillion, contributing to roughly 5% of the US GDP. This represents a 22% increase since 2019 and is driven in part by an influx of younger, highly skilled professionals seeking flexible alternatives to traditional employment. About 36% of US workers are now involved in the gig economy which equates to 59 million people in total.
Freelancers like the flexibility of time and hours, the ability to earn an income on the side, and the capability to monetize their skill. Half of the Gen Z workforce (age 18-22) have freelanced in the past year indicating a potential generational shift in the working landscape. The shift to freelancing is resulting in individuals earning far more money then they had at a traditional employer.
International expansion is something Fiverr is focusing on heavily with footprints in Latin America with launches in both Brazil and Mexico. This follows successful entries Fiverr made into a number of markets in Europe, including Germany, France, Spain, the Netherlands, Italy and Portugal.
With small businesses making up 96% of Brazilian companies, there is a large opportunity to increase brand awareness and subsequently bring new customers to the platform. Fiverr is not only launching in Portugese but also offering local payment options for buyers in the form of Boleto and Reis. Localizing the platform for the Brazilian market gives skilled professionals there the ability to take talents that they may have and monetize them, safely, through digital work. In the past year, Fiverr saw a 137% increase in new freelance registrations coming from Brazil.
12. Investment Strategy
Fiverr is experiencing accelerated revenue growth with high gross margins in an area where the large addressable market is expanding further. Fiverr’s founder-led mission is clear: Change how the world works together.
The stock does not come without its risks but I believe Covid has accelerated the trend to long-term remote work and LinkedIn entering the market further validates Fiverrs business to date. While the valuation is still rich, the recent market correction has improved metrics that should be more appealing for new investors.
I came across the stock after using the Fiverr service. I was so impressed with the experience that I opened a position in September 2020 at $130. After performing full due diligence, I have since added to my positions at $161, $191 and $218. Fiverr is a top 5 holding for me which I will continue to add to assuming the initial investment thesis does not change.
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Wolf of Harcourt Street
Disclaimer: I am not a financial adviser and I am not here to give specific financial advice. The opinions expressed are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. The information is based on personal opinion and experience, it should not be considered professional financial investment advice. There is no substitute for doing your own due diligence and building your own conviction when it comes to investing.