The 10,000-Foot Takeaway Investors Need on Fiverr Stock

Fiverr (FVRR 3.74%) generally serves independent consultants seeking smaller jobs, but the company is swimming upstream and going after larger companies. In this clip from "3 Minute Stocks Updates" on Motley Fool Live, recorded on May 25, Motley Fool contributors Brian Feroldi and Brian Withers discuss what could be Fiverr's biggest challenge moving forward.

Brian Feroldi: Moving on to Fiverr, ticker symbol FVRR, one of the leaders in the online consulting and hiring business for freelancers such as myself. Revenue at this period, revenue during the quarter, was pretty good. Up 27%, to just under $87 million. This is at the high end of management's guidance range. The number of buyers on the platform was up 11% to 4.2 million, and you couple that with the fact that the spending per buyer was up 17% to 251. That's been a big part of this company's growth strategy, a big part of many companies' and many software companies' growth strategies, is to swim upstream, and go after larger and larger clients. We're seeing that take hold. You combine those two things together, hence the 27% revenue growth on the topline. Now, Fiverr's take rate is approaching 30%, incredibly strong, 29.6% of each transaction the company takes as the platform fee. Now gross margin here is very good. It was down a little bit, but the adjusted gross margin was 84%. Spending still up everywhere on the platform, not as much as revenue and some other costs. However, this company is clearly in growth mode, trying to grab market share everywhere. While it did report a GAAP net loss of $17 million, that's nothing. New management did note that, adjusted EBITDA, Toby's favorite metric to measure profitability by a long shot, was profitable this quarter. They also said that's good because they typically frontload marketing expenses, and by the way, there was a joke. Adjusted EBITDA is a metric we all, I don't think, like. But this is a quarter when the frontload marketing expenses for the rest of the year. The business itself is doing good. However, management did note that they saw some slowdown in activity in March and April. Part of that was due to the opening up or reopening up of the world for COVID, and the other part is due to just the general uncertainty surrounding the Europe and Ukrainian war, which is still going on right now. As a result of that, management here changed their guidance a little bit. On the first in February, they were calling for $377-$379 million for the full year at 25-27% growth rate, and a positive adjusted EBITDA margin of about 9-10%. Now, they're calling for this number to pull back to 16-23% growth for the full year. A relatively challenging Q2 and less profitability, but a big swing in the profitability side there. Understandably, given the slowdown that's going on, this is a company that stock has been under pressure. It's a growth company which is trading at a very high valuation. However, the 10,000-foot takeaway for me is thesis on track, but expectations needs to be readjusted.

Brian Withers: Brian, I know this is a favorite of yours. One of the things you mentioned is the take rate. Actually, the take rate of 29.6% is the largest take rate that I've seen from platform businesses across even different industries, like Shopify's (SHOP 1.11%) is under 3%, Toast (TOST 3.42%) is right on 3%, Airbnb (ABNB 0.75%), right around 9%, Upwork (UPWK 3.40%), its major competitor, 14.1%, less than half of Fiverr's, and Etsy (ETSY 0.34%) is coming on the high side at 17.8%, but it's still 10 percentage points lower than Fiverr. I would think with this, I'm going to call it, egregious take rate that large customers would be incentivized to form direct relationships with their customers or move to other platforms. Is there evidence of this?

Feroldi: Oh, that is for sure a concern worth watching. That is definitely something to keep in mind. If you hire a consultant on Fiverr and they form a direct relationship with them and bypass you, that is something that Fiverr is actively looking out for and actively engaging in. If they note that, by the way, they knock down your profile, they knock down your ranking, and they penalize you on the platform for doing so. I also have shared that same concern, that their take rate is usually high. Just so we're on the same page, take rate is the total volume of transactions flowing through Fiverr's network between buyer and seller. How much of that does Fiverr keep for itself as revenue? However, one thing I will point out is, you have to remember the way that Fiverr pulls in that take rate. It doesn't all come from the buyer, and it doesn't all come from the seller. It comes from both parties. Both parties have a take rate on their transaction of about 10-14%. It's not like one party there is paying some huge number. However, this company is swimming upstream. It is going toward larger companies and there might be downward pressure on that in the future. In exchange for that though you get higher volume transaction. Remember what Fiverr is trying to serve. Upwork has been trying to go after enterprises, which is probably one reason they have a smaller take rate. Fiverr largely connects small businesses to independent consultants around the world. It's more of a platform for small businesses and small jobs. It makes sense if the take rate and percentage basis is higher, but you are 100% correct, this is something to watch.