Fiverr (NYSE:FVRR) stock is up 740% on the year with just a few days left in 2020. In spite of the massive increase in value, though, this is still a relatively small company with a market cap of just under $7 billion. COVID-19 is reshaping the global economy, and remote work is turning into self-employment and freelance gigs for many people. That trend has serious momentum, and Fiverr looks like a top way to bet on it.
The gig economy shifts into overdrive
Faced with layoffs and a new remote-work dynamic, tens of thousands of Americans have turned to self-employment during the pandemic in 2020. In fact, according to data compiled by the Federal Reserve Bank of St. Louis, a record 1.57 million new business applications were filed in the U.S. during the third quarter of 2020 alone. And U.S. Census Bureau data indicate the pace is far from easing, with nearly 85 million applications filed in the second-to-last week of the year.
Many of these new businesses are -- and plan to remain -- single-employee sole proprietorships. These single-person outfits, along with other small businesses with just a handful of workers, may turn to freelance work to generate revenue (or to get work done). Part of the gig economy, freelance work is when a company hires a contractor (rather than an employee) to complete a small project. Fiverr's platform helps facilitate freelance work connections between those in need of some help and individuals looking to make money off of their skill set. Specifically, Fiverr can be used to find and promote gigs in categories like graphic design, digital marketing, writing, and video animation.
This boom in self-employment is in turn responsible for the boom in Fiverr stock. The company expects full-year 2020 revenue to increase at least 74% over 2019 to $186 million, and the platform is beginning to reach unadjusted profitability for the first time as a publicly traded stock. Besides benefiting from a fast-changing workforce, Fiverr also got a boost by expanding into new markets in Europe and recently launched local-language sites in Brazil and Mexico. Access to the internet is opening new ways for people to make money around the globe. With growth coming in hot, the stock went from little-known and undervalued territory to a high-flying tech name.
Expensive but only in the here and now
However, Fiverr's pace of revenue growth (and the fact it's reaching a profitable scale) doesn't alone explain the massive advance in its share price. Fiverr stock currently trades for 40 times trailing 12-month sales, and its nearly $7 billion market cap valuation is greater than fellow freelance work site Upwork's (NASDAQ:UPWK) $4.5 billion cap, even though Upwork has hauled in more than double the revenue in the last year.
Granted, Upwork has been growing at a far slower pace than Fiverr (24% year-over-year growth during its third quarter), thus explaining the difference in valuation. But Fiverr is undeniably expensive when looking at current results. This stock is all about future potential, and investors are willing to pay the hefty premium based on an expectation for double-digit revenue growth to continue for some time. With so many small businesses and sole proprietorships starting up, there could be years'-worth of growth for Fiverr, as it helps connect companies in need with freelancers looking to monetize their talent.
There could be many more workers who join the freelancer ranks as well. A recent Fiverr survey showed that some two-thirds of the U.S. remote workforce was interested in gig work. And a study from Mastercard projects that gig economy payment volume (which includes non-Fiverr platform categories like transportation-for-hire and vacation rentals) could increase from nearly $300 billion in 2020 to $455 billion in 2023. Fiverr can only address a fraction of the gig economy pie, but it's a growing pie with potential for this company to expand into other areas.
Is Fiverr stock a buy? If you're looking for a quick payoff in 2021, that's far from a guarantee after shares notched such an epic return in 2020. Expect some serious volatility as Fiverr starts to lap its exceptionally good results from last year. But if you think freelance work will continue to expand in the years ahead, this outfit deserves some attention -- and could be a buy right now if the plan is to hold onto the purchase for at least a few years or more.
I'd caution against making a sizable investment right now, but for investors who want in for the long haul and have room to buy more (perhaps on a quarterly basis), don't write off Fiverr headed into 2021. If you decide to buy, just remember to keep the position small.