According to data compiled by the Federal Reserve Bank of St. Louis, applications for new businesses in the U.S. hit a record high of more than 883,000 during the second quarter of 2020, building on a trend toward self-employment in recent years. And the U.S. Census Bureau's statistics for the third quarter are showing an even more dramatic spike. During the week ending Sept. 26, 2020, new business applications increased 44% from the same period in 2019 to over 95,000.
The reason? For many people, layoffs during the pandemic were the last straw, and working for themselves and marketing their skillsets is easier than ever thanks to advances in technology. There are plenty of ways to invest in this emerging movement as well. Five that I think are worth a look for the decade ahead are Etsy (NASDAQ:ETSY), Shopify (NYSE:SHOP), Wix.com (NASDAQ:WIX), Fiverr (NYSE:FVRR), and Cloudflare (NYSE:NET).
1. Etsy, 2. Shopify, and 3. Wix: Liberating retail from the shackles of same-ness
Retail should be a great pathway to entrepreneurship and business ownership, but big box stores and e-commerce giant Amazon have made it difficult for small businesses to thrive by outcompeting them on price (and thus all but eliminating profit margins). But a new digital era is breathing life back into small business retailers, reducing overhead costs (there's little to no need for significant real estate investment, and technology to improve operating efficiency) and satisfying consumer demand for variety.
Etsy has been a big beneficiary of this movement, and 2020 could be a landmark year for the online marketplace for handmade goods. Through the first half of the year, the number of global sellers utilizing Etsy (comprising both creative sole proprietors and small businesses with just a few employees) has increased 35% from a year ago to over 3.1 million. The number of active buyers has increased by 41% year over year to over 60 million. The results have been game-changing for Etsy. The value of gross merchandise sold on the marketplace was up 91% through the first half of 2020 to $4.04 billion.
Those sound like big numbers, but there is plenty of room for further growth. Etsy as a platform didn't even crack the top 10 list of the largest e-commerce sites in the U.S. in 2019. And given that e-commerce still comprises just 16% of total retail sales in the U.S., this story of expansion is far from over. CEO Josh Silverman often points out that nearly everything that can be found on Amazon and other retail giants can also be found on Etsy -- but the merchandise has been handcrafted, and buyers can interact directly with the source of what's being purchased. I think this will be a compelling story for both shoppers and those aspiring to be self-employed for years to come.
Shopify is another supporter of small businesses and entrepreneurship, although it isn't a marketplace like Etsy but rather a software and e-commerce service provider. Like Etsy, it also had a big uptick in new business sign-ups this year, reporting a 71% increase in new e-commerce site creation in Q2 2020 over the previous quarter alone. While it's unknown how many of these new businesses will make it long-term, it nonetheless speaks to the power of Shopify as a creator of opportunity rather than a creator of jobs.
Granted, Shopify is one of the most richly valued stocks around right now. Shares are currently valued at over 60 times trailing 12-month sales -- a premium that assumes that the nearly-doubling of revenue in Q2 will continue the rest of this year and that double-digit percentage expansion will continue for the foreseeable future. But for those who think a digital retail landscape favoring many smaller players is the future, Shopify is worth buying for the long haul.
Similar to Shopify is the much smaller website builder and management outfit Wix. It doesn't have the digital retail logistics capabilities its larger peer possesses, but the flexibility and ease-of-use it offers have made its enduring growth story a resilient one during the pandemic. The company's web-based software has helped a diverse field of businesses and professionals migrate online, from restaurants to personal trainers to business consultants.
Wix said the number of registered users on its platform increased 64% year-over-year during Q2, which will eventually translate to revenue growth as those users start paying for Wix's various website and related digital services. And paired with the growth potential is the fact that Wix is a profitable enterprise, which may appeal to investors who are turned off by Shopify's heavy spending to prioritize revenue growth. Wix generated free cash flow (revenue less cash operating and capital expenses) of $86.6 million on revenue of $452 million during the first half of 2020. Not a bad combination for those looking to bet on the self-employment movement.
4. Fiverr: The gig economy, a path to flexible work
Another trend supporting the self-employment movement is remote and gig work. Access to high-speed internet and a decade-plus of cloud computing development have resulted in a big uptick in the adoption of remote work. Many organizations are also tapping freelancers to handle projects rather than bringing in full-time employees. This has opened the door to self-employment for many workers via the gig economy -- non-employee contract work performed by freelancers and contractors.
Upwork is the leading platform for businesses to connect with freelancers, but upstart Fiverr is quickly catching up. Revenue increased 63% through the first half of 2020 to $81.3 million, and full-year guidance is calling for at least a 66% increase over 2019. The small gig economy platform also recently turned free-cash-flow positive. Driving the stellar results is a combination of organizations embracing contract work (active buyers at the end of Q2 increased 28% from last year to 2.8 million), expansion of the platform into new countries (Fiverr launched services in Italian and Dutch), and the addition of new job categories and platform features (Fiverr Business was launched, a collaboration tool for businesses to connect and transact with each other). If self-employment trends continue, Fiverr has a lot more to gain in the years ahead.
5. Cloudflare: Software development tools free engineers from the cubicle
Self-employment and small business aren't solely the realm of the retail and creative communities. Technology professionals are also finding new outlets to make money without the need to find steady jobs. Cloud-based development and collaboration tools are helping many software and tech infrastructure engineers go it alone, and many of those same tools are helping small businesses upgrade their operations for the digital age more quickly than ever before. Cloudflare is leading the charge on this front.
Cloudflare is a web security, content delivery network (infrastructure that moves data across the internet), and web- and application-developer platform. But unlike many other technology firms, Cloudflare usually brings new services to market for individual developers and small businesses -- often releasing new products (or some features of products) for free. Cloudflare has loaded up its funnel of potential paying users with this approach, and it boasted having over 3 million free and paying customers at the end of June 2020. Cloudflare said its large customers (those that dole out at least $100,000 a year to Cloudflare) increased 65% year-over-year to 637, but its strategy of releasing new tools for small and free users gets it early access to future leaders in the tech world before they become household names.
For those taking the leap into self-employment and starting small businesses, Cloudflare could be a key technology ally -- and a great way to invest in the continued expansion of the self-employment movement.