What happened

Shares of Fiverr International (NYSE:FVRR) rose 11% in January, according to data provided by S&P Global Market Intelligence. It was a continuation of a trend that began September 2019, when the company, which operates an online marketplace for freelancers, hit an all-time low of around $17 per share. January's 11% gain brought the total rally up close to 50%.

There was only one noteworthy news item from Fiverr in January: It scheduled the release of its fourth-quarter and full-year 2019 earnings for the morning of Feb. 19. Perhaps that was enough to excite investors, though, considering the company beat its revenue guidance in the third quarter.

A woman excitedly looks at her phone.

Image source: Getty Images.

So what

In its initial public offering on June 12, Fiverr priced its shares at $21, but they quickly rocketed above $40, giving the company a market capitalization of more than $1 billion. Considering the company went public with just $82.5 million in trailing-12-month revenue and wasn't profitable, that was a steep valuation, even for a growth stock. So it wasn't surprising that the shares sold off after that initial pop.

Investors reevaluated Fiverr's valuation as its quarterly results came in. Second-quarter revenue was $25.9 million -- up 41% year over year. Revenue growth accelerated in the third quarter, rising 42% to $27.9 million, which beat management's guidance by 7% at the midpoint. 

Given these results, investors are understandably optimistic about what Fiverr might report later this month.

Now what

Investing in IPOs is tricky. Share prices often oscillate widely in their first several months on the market as investors grapple with understanding a new business and its opportunities. That's why it can be a good idea to wait on the sidelines until things settle down.

That said, the most important thing a company can do after it makes its Wall Street debut is report solid earnings. By beating its own guidance, Fiverr took a big step forward in that regard. Investors will want to keep an eye on guidance when it reports again later this month. This stock still has a high valuation that will only be justifiable if it can maintain high-quality growth.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.