Something really interesting has been happening during the pandemic. Faced with layoffs and inadequate work prospects—but armed with technology and access to high-speed internet like never before—hundreds of thousands of people started businesses in 2020.
The trend is continuing into 2021. According to data from the U.S. Census Bureau and the Federal Reserve Bank of St. Louis, new business applications have surged to record highs since last spring. Over 423,000 were filed in February 2021 alone, a 42% increase from the number a year ago.
Many of these are small businesses and sole-operator outfits, as individuals turn to the gig economy to take command of their income potential. This new trend bodes well for high-flying gig economy platform Fiverr International (NYSE:FVRR) over the next five years.
A banner year for gig work
Much as working from home is going mainstream in the corporate world, gig work (a temporary side job or task taken on by an individual contractor) is becoming an increasingly important part of the economy. In times past, it might have been a way to supplement a day job. During the pandemic, however, many individuals and small businesses are turning a steady stream of gig work into their primary income generator.
Enter Fiverr, which helps businesses who need to get things done (buyers) connect with gig workers (sellers) who can do them. The company started out facilitating micro transactions worth as little as a few dollars, like translating a paragraph from one language to another. However, average spend from buyers has been growing as larger businesses have started to embrace gig work.
Active buyers grew 45% year over year to 3.4 million in 2020, and average spend increased 20% to $205. High-value buyers, those who spend at least $500 a year hiring sellers on Fiverr, represented 58% of the platform's revenue during the final months of the year.
But all of that is in the past. Fiverr is looking ahead to a world of gig work giving businesses and self-employed folks added flexibility. A primary part of its strategy involves moving upmarket from micro transactions to facilitating longer-term gigs with higher dollar value. To that end, it acquired creative-talent platform Working Not Working, which includes Alphabet's Google, Netflix, and Spotify among its users.
Fiverr is constantly adding new categories of work, too. Furthermore, the company has launched new tools for buyers, like subscriptions for longer-term hires. For example, buyers can hire a monthly social media marketing manager, a virtual assistant, or a graphic designer -- and keep the gig rolling for a three or six month stretch.
The gig economy isn't just the realm of the U.S., either. Fiverr recently debuted TV marketing campaigns in Europe and Australia, and supports six other languages besides English. Expanding its availability in other countries is a cornerstone to its expansion strategy. This is a huge growth lever for the company to pull, though. Most of its revenue still comes from North America, and it only just started localizing its site in new overseas markets the last couple years. France was the latest last summer. The international potential for the gig economy could thus help Fiverr continue its rapid pace of growth for many years.
How high can it fly?
Fiverr believes the pandemic set off a shift in thinking about gig work. And with hundreds of thousands of people worldwide (if not millions) turning to the gig economy for some extra cash, there's no shortage of talent out there for businesses to tap. Fiverr thinks its addressable market is worth $100 billion a year in spending in North America alone, and perhaps some $300 billion worldwide by some external estimates. This global figure could approach $500 billion a year by 2024.
Granted, the gig economy encompasses ride-hailing services and asset sharing (think Uber and Airbnb), areas Fiverr doesn't address. But as management expects its revenue to be $277 million to $284 million in 2021, Fiverr's annual sales are still small potatoes in the context of the global gig economy. For the sake of illustrating the point, Fiverr had a take rate of about 27% in 2020, implying north of $1 billion will be spent on its platform in 2021.
The cat's out of the bag on this stock. Shares skyrocketed over 800% from the start of 2020 to the time of this writing. And with a market cap of $7.8 billion, shares are an expensive 38 times trailing-12-month sales. But this is a profitable business (free cash flow was $13 million in 2020), giving it the ability to expand without the need to dip into cash on its balance sheet. There's a pretty good chance this gig-work facilitator is still growing in five years' time.
But is it worth paying up for? That depends on the type of investor you are, and how long you plan to hold. If you're looking at Fiverr's potential a few years down the road (the further down the road, the better), taking a small position might make sense. The emphasis is on starting small, though. Give yourself room to buy more shares on inevitable dips, like what happened recently during the tech stock sell-off (induced by rising interest rates, which lower the value of future cash flows and stock valuation).
But such short-term distractions need not concern an investor looking for a long-term growth story. Fiverr is gobbling up share of the gig economy and unlocking new ways for businesses and a new generation of self-employed contractors to participate in it. This remains a high-growth name worth keeping an eye on.