These two stocks went in opposite directions after reporting strong results. In this episode of Industry Focus: Tech, we talk through why the freelance marketplace operator and the Latin American e-commerce giant are both doing just fine.
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This video was recorded on August 6, 2021.
Dylan Lewis: It's Friday August 6th and we're checking out earnings from Fiverr (FVRR -4.24%) and MercadoLibre (MELI 0.43%). I'm your host Dylan Lewis, and I'm joined by Fool.com's favorite friend of free-flowing Foolish financial forms, Brian Feroldi. Brian, how are you doing?
Brian Feroldi: You finished my title there on a down note, Dylan. I wanted something pep out of you next time.
Lewis: But then I come up with the Brian Feroldi, no?
Feroldi: Okay, sure. We'll go with that. Hi Dylan, happy Friday to you, my friend.
Lewis: Energetically, Brian, I'm so excited to talk to you. I am excited to talk to you. We have a ton of earnings to sift through and it's an embarrassment of riches this time of the year. I'm particularly excited because we're going to be hitting on earnings from a stock I own. I think we're talking about two stocks that you own, is that right, Brian?
Feroldi: That is correct. I am an owner of both of these stocks. Both companies reported interesting earnings reports, and these two companies headed in completely opposite directions. So it'll be interesting to dig into the details of why that happened.
Lewis: Yeah, and these are too heavily followed names in the Fool universe, Fiverr and MercadoLibre, two companies that have been pretty big beneficiaries of the pandemic and the pivot to digital in different ways, but very much right into tailwinds there. Brian, why don't we kick things off talking through Fiverr and for anyone that's following along, the ticker is FVRR. What were the headlines from their earnings report?
Feroldi: We've covered Fiverr numerous times on this show. We've compared them to Upwork. For those that don't know, Fiverr is a leading online marketplace that you can go to to hire freelancers to get any work done that you need to do. Fiverr is a Foolish favorite and for good reason. This company has been in hyper growth mode for the last couple of years. It's been stealing market share away from Upwork and it checks so many of the boxes that we look for in a great investment. 2020 was a phenomenal year for Fiverr for pretty obvious reasons, so it will be interesting to see what the results will be as we head into a post-COVID world. The numbers from Q2 were really, really strong. Revenue in the quarter grew 60% to $75.3 million. That was not only ahead of management's guidance, it also beat Wall Street's estimates. More importantly, in the year ago quarter, revenue growth was 80%. This was 60% growth followed by 80%. It's not like the company had a terrible Q2 the previous year. Really strong result in the top-line. Bottom-line also looked good too. Non-GAAP net income more than doubled to $7.9 million or $0.19 per share. Analysts were only expecting $0.14, so looking backward, pretty good.
Lewis: Yeah, Brian, you mentioned that this is a Fool favorite stock and I mean, this is a business that has gotten a lot of attention over the last year in change. It doesn't really matter when you look back, if you go back to 2020, it's a multi bagger from most points in the early part of the year. It's a business that has a lot of expectations priced into it and I think probably a lot of people are expecting big things just based on what has happened with this company so far. We know though with a lot of these companies that some growth has been pulled forward. We have to figure out what our expectations should be for them as we continue to move through the pandemic and have some parts of the world reopening a little bit.
Feroldi: Yeah, that's entirely true. Again, we're in a weird position in the market right now. We covered this previously. Last week we talked about Pinterest, where we saw a whole bunch of activity that to your point, got pulled forward to 2020 and what is that going to happen in the rest of 2021 as people start to go outside. While the numbers I just mentioned for the headline numbers for Fiverr were really, really great, this stock actually fell more than 20% on the day of the earnings report. If you are confused about why that could happen, it really comes down to just one thing and that is guidance. Management was previously estimating that for the full year, revenue growth was going to be about 60% to $302-308 million. That's what they believe was going to happen just 90 days ago. In this earnings report, management said that they are updating their guidance to only be about 50% growth. They're saying that revenue is going to be about $20 million less for the full year than they were previously expecting. When you hear something like that, it's not surprising to see a high-growth, high-flying stock really get whacked.
Lewis: Yeah. I think what's encouraging is, we know ultimately that the dollars and this is going to be a recurring theme with both these companies to talk about, the dollars are important and the financials the companies put up are important. The core business metrics, certainly for the next time that we're going to talk about MercadoLibre, but I think Fiverr to some extent too being a high-growth stock or perhaps more important in understanding the trajectory of the business long term. When you look at the core business numbers here, Brian, there's still a lot to like.
Feroldi: There really is and that's one thing that I think all investors need to train themselves to do. It's really easy to just look at what's happening with the stock and say, something went terribly wrong. But if you dig into the company's results closely in the quarter, there's a lot of reason for optimism, I believe. Active buyers, the number of people that are on Fiverr that are buying from the company, grew 43% to more than 4 million. Spending per buyer, so each of those buyers that's on there, grew 23% to $226 per share. Not only are there more buyers on Fiverr, those buyers are spending more and that translated into pretty good financial results up to now the income statement. The company's take rate grew 80 basis points to 27.8%. That's a very, very strong figure. Non-GAAP adjusted gross margin, extremely strong, 84.4% while expenses overall grew 80%. This company still reported adjusted net income and produced more than $15 million in free cash flow. If you look at the other core numbers for the company, they look good.
Lewis: Yeah, and I think with the full context of what's going on with the business and also thinking back to the show that we did, I think it was last week talking about Upwork's earnings, they talked a little bit about how they know that they're running into some seasonality that they didn't really experience in 2020. They're starting to see what feels a little bit more like the normal cycles of business coming into effect and people spending a little bit less time in front of a screen in the summer months. Maybe taking a step away from working, slowing down a little bit, possibly taking a vacation, that seems to be a big part of the story here with Fiverr.
Feroldi: That's really the theme that management said for the downward revision to guidance. They basically said between vacations, summer and school holidays, and people desperate to go out and interact with the world, people are spending less time online than they were previously and they could, "To be prudent, we are adjusting guidance for the year 2021 downward based on these incremental trends over the past few weeks." That is obviously a bummer if you are a Fiverr investor like I am. But again, if you look at the numbers that are closer, what management said on the conference call, I think there's reasons for optimism. For example, management said, "If you look at the past two years, we have effectively doubled our active buyer base, tripled our revenue base, and achieved a nearly 30% positive swing in the EBITDA margin. We grew significantly faster than our competitors, expanded our market share and rolled out new products and services." That all sounds great to me.
Lewis: It does. Brian, I like that you emphasized that. Because I think looking through earnings calls this quarter in particular, I have seen a lot more management teams look at two-year comps than I'm used to seeing. I think it's just a reality of how management teams and the IR folks that a lot of businesses are trying to get people to look at their companies and somewhat normalized for the craziness that was 2020.
Feroldi: Yeah. Normally, if a management team was making that comparison out of the blue, your spidey sensors should be going up saying, what are they pulling over? But given the extreme situation that we've all been in over the last year, that's something that I buy and believe in. Again, if you look at this company's two-year results, they're nothing short of fantastic. Another thing that was interesting in this conference call that I was particularly excited about was, they launched something called Fiverr Business just three quarters ago. Fiverr Business allows companies to get access to a pre-vetted group of talent on Fiverr and Fiverr does all of that concierge service for them. If you are a business and you don't want to go through that process of picking out an individual freelancer and then testing them out for their skills, Fiverr can take care of all that for you. Again, this was only three quarters old, but the company said that Fiverr Business already represents 5% of the company's core marketplace business. "Early data indicates that buyers significantly increased their spend with us after joining Fiverr Business." This new business line appears to be off to a fast start.
Lewis: Yeah. This is such a no-brainer, I think, for them as a business. We talked about Upwork last week and I think it's great that we're able to stack those two conversations against each other because these are two businesses that operate in the same space and a lot of the trends affecting them are going to be the same. But also strategically, we know they're coming to this market from slightly different sides. Upwork is generally seen as more of an enterprise solution, working a little bit more with companies. Fiverr, perhaps more for small businesses, people that have creative projects and need some help. Both of them are creating projects, creating offerings for customers that get at the thing that they are currently a little deficient in and that's where Fiverr Business comes into play. With Upwork, it's a little different. It's creating those pre-packaged things so that people can make sense of the marketplace and the offerings in a way that's a little bit less intimidating.
Feroldi: I think that's one of the big reasons why we've seen Fiverr continuously take share in this market. It started at the low-end and it is successfully swimming upstream. Another detail from the call was that management said that, "High value buyers now represent 61% of core marketplace revenue." That figure was up from 55% a year ago. I think that number will continue to improve over time because during this quarter, the company set up partnerships with Salesforce.com and Wickes. What that does is customers of those two companies and those two companies have millions upon millions of customers, can get access to Fiverr's talent pool in a much more streamlined way. They make available one-click buying and hiring if you are a Salesforce.com customer or a Wickes customer. I think that that's going to be a successful program. Again, I think the company's future continues to look bright.
Lewis: Yeah, I love those partnerships and I think to the way that the Fool uses Upwork and we've been Upwork customers for several years now. You want to get in early with companies when they are exploring these solutions because it's very sticky once you're there, and I think the switching costs are very high. Both of these businesses are in customer acquisition mode. It's interesting to see them duke it out. Ultimately, Brian, we kind of come back to the same place almost every time we talk about them. There's nothing wrong with buying both of them.
Feroldi: There's really not. But I think the bigger point is when you see a stock that you own get crushed, and it's because of a guidance pullback, that is a scary proposition. You could easily say to yourself, the thesis must be busted by this company, but it always behooves you to slow down, read their conference call, ask yourself if the reasons for the slowdown make sense. The big question I always ask is, is the long-term thesis for owning this stock still intact? When I read through the details, I come away firmly believing the answer there is yes.
Lewis: Yeah, I think that's 100% right, and you're just trying to connect the things that management is specifically highlighting in the call with where you think this industry is going. We just ran through Fiverr business and how this is probably a huge part of where this company is going and what it looks like Brian, maybe three, five, 10 years from now. I think it's undeniably more successful if it's able to create a large Fiverr business segment, maybe it becomes the largest part of this company down the road.
Feroldi: That would certainly be a wonderful turn of events if that happens. But yeah, to your point, I think that both Fiverr and Upwork are still in the very, very early innings of the long-term growth trajectory. So while it's disheartening to see it's stocks get punished in the short-term, I'm personally not selling any of my shares.
Lewis: I'm curious, Brian, knowing this is in your portfolio, I don't know where this stock lives in terms of the position for you if you've built it out over time or if you're still building into position a little bit. Are you looking at the pullback recently and say maybe it will be adding to it?
Feroldi: Well, it's always been important to put pullbacks into context. Yes, a one-day 20% move doesn't feel good, but the share price is all the way back to where it was in April. Basically, just over three months of gains were wiped away in one day. This is still a pricey stock even after this pullback. But having said that, Fiverr is not a full position for me yet. I scale into position slowly so I could easily see myself continuing to add to this company for a long time.
Lewis: I love that historical step back. It's easy to get lost in the day-to-day movements. But knowing yes, in fact, it's just three months of share price appreciation can often be very helpful. Brian, we have a slightly different story with MercadoLibre, the second stock we're going to be talking about. I'm not going to bury this one. Basically, another incredible quarter for MercadoLibre. This has been a business basically on fire in a good way. Not a dumpster on fire. All cylinders firing type fire. Just wonderful stuff across-the-board e-commerce. No surprise front-and-center with 2020 and 2021 and the payments business for this company absolutely taking off. The main driver for a long time with this business, Brian was that e-commerce operation. Let's start there with the results. Gross merchandise volume of over $7 billion was up 46% in local currency, 245 million items sold, up 37% year-over-year. This company is over 20 years old, and those are the top-line numbers that we're seeing for its core business segment. Absolutely incredible.
Feroldi: That is incredible, and when I invested in MercadoLibre for the first-time, almost a decade ago. At this point, it was essentially you were doing so because of its e-commerce platform, its Mercado Pago, is a payment platform with a nice to have future that they were still developing. But as I think you are about to point out, that has now become the star of the show.
Lewis: It really has. I mean, the thesis for the stock has shifted dramatically over the last couple of years. Keep that number. I just said gross merchandise volume is $7 billion in your head because total payment volume for their payment business, $17.5 billion up 72% year-over-year in local currency. Not only is it bigger, but it's growing faster. I think it can tell this is where this business is going. This is going to be a really large part of the tailwinds that this business enjoys. I think crucially, Brian, they break this out into on-platform and off-platform payments. Brian Stoffel, one of our colleagues, has done a remarkable job over the last couple of years documenting this story. We hit a point a couple of years ago, where off-platform became a larger part of the contributions to total payment volume. It is blowing on-platform out of the water at this point. On-platform is just over $7 billion, up 47% year-over-year, basically tracks with GMV. Off-platform over $10 billion and up 94% year-over-year to back it out a little bit and get a little bit less wanky for folks that don't follow the company as closely Brian. This basically means that Mercado Pago is stepping in as the PayPal, Venmo, go-to digital payment system for Latin America.
Feroldi: That's incredible. As you pointed out just below here in notes, 730 million transactions for the quarter, that figure was up 100 million sequentially, 100 million more transactions in a 90-day period, and that figure was up 80% year-over-year. They have 39 million total users on their Mercado Pago platform. To me, MercadoLibre is the ultimate example of the importance of optionality in a business, you want a company to have multiple futures ahead of it. That is exactly what this company has done.
Lewis: Yeah, I don't think the story ends. I mean, with optionality for them, it's easy to think, oh my gosh, this company has got an incredible run depending on when you bought it. It's easily attend bagger for some people, it's a multibagger for a lot of other people, it's still only a $85-, maybe $90 billion business, and there's so much to like, I realize, we went immediately to some of the key business metrics here, Brian, and some folks probably wanted, OK, what was the top-line? What was the bottom line here? I do think it's important when we talk about MercadoLibre, I'd say many businesses in over a dozen countries. A lot of different currencies come into the mix. We tend to focus on the key business metrics here, just because they're not as subject to the wins of local currencies and fluctuations that happened there. Because everything winds up getting repatriated back as dollars when they report. That said, the dollar figures were still super strong for Mercado Pago, net revenue reached $1.7 billion for the quarter up 94% in U.S. dollars and 103 in a foreign currency forex neutral standpoint, they actually made just under $70 million for the quarter. Brian, I'm not really looking for them to be posting net income, but it's nice to have, I guess, as a kicker.
Feroldi: Yeah, I always like it when this company reports net income, and a few years ago, it was reporting significant amounts of net income so the P/E ratio was actually a useful metric for them. They have really dove deep into reinvesting their business as aggressively as they possibly can. That has pushed their net income above and below zero in some quarters. To your point, it's nice to see that they report our positive net income, but that's not the story right now, the story is revenue growth, and on that front, they are crushing it.
Lewis: Yeah. You just mentioned the investment in the business. I think if you're looking for something to quibble on, gross margin has dipped a little bit year-over-year, 44% versus 48% a year ago. The big reason for that is the heavy investment they're making in their business. Basically, their first-party commerce sales and the logistics fulfillment center operations and the rollout related to that, eating into some of the revenue and causing their gross margins to come down. Those are long-term investments and those are things that strengthen their offerings, so they are sensible to me. We teed it up a little bit before, Brian, but there are so many reasons to still be super excited about this business, even given that it is now almost a $90 billion company. In large part because if you look over at some of the U.S. counterparts, that MercadoLibre is an amalgamation of PayPal, you have Amazon, you have Square. That's a ton of money in market cap. It's a lot of opportunities in front of this business.
Feroldi: Yet MercadoLibre is only a $80 billion company, and one other interesting thing to note there is Sea Limited, which is like the MercadoLibre of Southeast Asia, I think have a payments platform. They also have a marketplace platform. That market cap is $160 billion. If you've been paying attention to them at all, they have been making serious investments and inroads in Latin America's market for both their payment and e-commerce platform. That's something that I think MercadoLibre investors need to keep an eye on, so the fact that the company is still growing this strong, even though they're seeing increasing competition from the likes of Sea Limited, was a really good time.
Lewis: Yeah, and you can see why there's investment there. The management team for MercadoLibre is specifically pointed out in the earnings call in the '20-'21 eMarketer report, they pointed to Latin America as the leading region in the world for e-commerce sales growth, almost 10% higher than projections for the worldwide average, and three of the top five markets are MercadoLibre markets, Brazil, Argentina, and Mexico. Brian, you mentioned optionality before. I think that MercadoLibre is a business that is worth owning for so many reasons. I mean, it's a great stock. It has been a wonderful performer for people that have owned it. But I think it is a very teachable stock as well. I think it's a business, especially if you are a relatively new investor, that is worth having a position in, because it will force you to follow it and understand how businesses find accelerating revenue and also how businesses find expanding total addressable markets overtime.
One thing I want to call out from their earnings is that they specifically say with all the excitement around their payments offering, we're confident that we can continue to overlay financial services through the digital wallet such as insurance, debit cards, and more immediately, access to credit loans. We didn't get too far into a lot of their financial services offerings. There's plenty to dive into there, Brian. But I hear them say things like that. It's easy to think, "Okay, well, total payment volume, we know what peer-to-peer might be, we know what peer-to-merchant might be." But then you realize once you have people in there with digital wallets, there's all these other financial services that can be layered into what Mercado Pago offers or what MercadoLibre offers with different product offerings.
Feroldi: We've seen a lot of innovation in the fintech space and the buy now, pay later, for example, category has become enormous around the world. That is something that just makes sense, especially if you're going to be making a several thousand dollar purchase in the United States. But when you're talking about some smaller economies where the average income is much lower, if the "buy now, pay later'' feature for even a few hundred dollar item can really be a key thing that will enable some people to make purchases. That feature to me is a natural fit for that market, and MercadoLibre is uniquely positioned to roll that out.
Lewis: Yeah, and if you've been paying attention to the news this week, you know that there are plenty of American firms that are looking at that space and are pretty excited as well. Big acquisition there with Square and Afterpay this week. I think for a while, we've seen MELI follow plans that some other slightly more established firms have laid out for how to attack certain markets. In this case, I think they're moving right alongside them.
Feroldi: No need to reiterate the real threat in the market. I mean, MercadoLibre, the business is essentially a borrowed idea from eBay and PayPal in the United States and clearly they are executing really well. So, more power to them. Take those good ideas you see elsewhere and incorporate into your business. That's what smart management teams do.
Lewis: Yeah. They bundle it into something that is just an incredible ecosystem, an incredible offering. Some of these things that reinforce the strength of each other and really create flywheel effects. I mean, what's so wonderful about the payments business being as big as it is, it starts out as something that enables on-platform transactions. You're able to communicate digitally and also pay digitally, and transact digitally. Then all of a sudden, it grows into this thing that people are using for something totally different, and actually it brings people onboard in a way that allows them to transact on your platform. It becomes a growth engine in different ways. That's what optionality is for you, I think this is why it's one of those businesses that is just worth studying.
Feroldi: Yeah, another reason that this business is worth studying is, if you just pulled up a long term chart of MercadoLibre, you basically see a line that moves up into the right in a pretty restricted action. But if you've been an investor in this business, the actual experience supporting this stock has been nothing but smooth. This is a company that regularly goes through 25%, 35%, or even 45% drawdowns during the year for a variety of reasons. This has been an extremely volatile stock to hold. But if the entire time you are just a believer that Latin America is a growing market, MercadoLibre is a leader in this space and long-term, I like the company's chances, you've been hugely rewarded. But make no mistake, this has not been a turbulent-free stock to own. The volatility here has been extreme.
Lewis: Brian, I am actually looking at the stock chart right now. You go back to 2018, 2019, 2020, and even right now, 2021, the company has experienced 20% drops from highs in every single one of those years. It's just the reality of a business that is incredibly disruptive, has a lot of tailwind behind it, but also a lot of expectations built into it. Also, unique to them, working in a bunch of different economies that have a lot of different currency things happening and having to bring that money back in dollars. It can create a little bit of havoc with their finances. But what we know to be true is the tailwinds remain incredibly strong for this business, and they continue to find really interesting spaces to grow into.
Feroldi: That's it. That's why we always say, focus on the business, not on the stock. Because if you just look at this company's business results, we've been nothing but impressed, essentially since this company came public. If you're just better at stock, you have nothing but heartburn. So focus on the business, not the stock.
Lewis: I will say, Brian, I am someone who is very happy with my MELI position. It is, I think, my largest holding at this point, I think is about 11% of my brokerage account. Not my overall net worth, but specifically the brokerage account where I own individual stocks. For a while, I've said it's big, I don't know if I want to add to it. I'm seeing such incredible results from this company, and I have some cash coming in that I'm going to be putting to work. I think I'm probably going to be adding a little bit, just because the results are so strong and it is not hard to think of this as a multi-hundred billion-dollar company five to 10 years from now. It feels like it's probably worth adding a little bit for me.
Feroldi: To each his own, like you, this is my No. 1 holding, not because I set out to be my No. 1 holding, it's just appreciated so much that it's grown into that position. I personally don't add to any stock after it becomes a 3% position for me. But to your point, given the results that we're seeing and given the execution, I understand why you're tempted.
Lewis: Yeah, and there we go. I mean, it's wonderful to be able to kick around different allocation ideas and different thoughts on how to put money to work, even within people who agree on the same stock price. It's one of the choices of doing what we do.
Feroldi: There's no right or wrong way to invest, and I'm not saying that my way is right, I just think it's the right way for me. But I know other people like you that have double-digit positions and are looking to add to them because they want concentration in their top ideas. Again, there's no right or wrong way to do it.
Lewis: Yeah. I will add the caveat here. I'm only in that position because I'm diversified wildly elsewhere, like the amount of my individual brokerage account is a relatively sizable amount, but it's in addition to money is in 401(k)s, money is in IRAs and other positions. It's a piece of the pie and that's what we always have to remember, Brian.
Feroldi: That's right. You always got to keep your entire pie in mind, not just your portfolio.
Lewis: That's right. Speaking of, I'm eating pizza later today, Brian, and I'm very excited going ahead over to Timber, a great slice of pizza in Washington, DC. I hope you have some good weekend plans as well.
Feroldi: We have a birthday party for one of our neighbors coming up. That should be fun, also they have a huge water slide in their yard, so you can bet that I'll be on that within the next 24 hours.
Lewis: That sounds awesome. I think you're winning the weekend so far. We'll check in on Monday and see who actually got the W. Brian, as always, thanks so much for joining me on today's show.
Feroldi: Thanks for having me, Dylan.
Lewis: Listeners, that's going to do it for this episode of Industry Focus. If you have any questions or you want to reach out and say "Hey," shoot us an email at [email protected], or you can tweet us @MFIndustryFocus. If you're looking for more of our stuff, subscribe on iTunes, Spotify, or wherever you get your podcasts. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy stocks based solely on what you hear. Thanks to Tim Sparks for his work behind the glass today, and thank you for listening. Until next time. Fool on.