Freelancing-marketplace operator Fiverr International (FVRR +2.04%) lets small businesses and individuals buy or sell a product or service for as little as $5, hence its name. While that's where it got its start, today you can find gigs for over $1,000.
It's that essence of affordability that makes Fiverr so attractive and explains why so many users looking for jobs or services seek it out. Yet being the low-price leader comes with risks, and it also invites competition for scaled-up quality, most notably, Upwork. There are also smaller outfits like Freelancer and Guru to consider.
Below, two Motley Fool contributors debate the merits of this gig economy stock's potential.
Image source: Getty Images.
Bull case: Fast-growing gig leader has legs
Rich Duprey (Bull): The labor force participation rate, or the percentage of the population that is working or looking for work, is at its lowest level in decades even though the unemployment rate stands at 4.6%.
That means a whole bunch of people have dropped out of the workforce, though with the rise of the gig economy, it may mean a lot of them have just decided to work for themselves. Freelancing outfit Fiverr, whose technology platform connects freelancers with individuals and companies in need of their services, has been one of the driving forces leading them on their way toward independence.
Its stock is down 43% from its 52-week high over fears of a post-pandemic hangover in activity that will inhibit its growth rate. They shouldn't have been so worried.
Third-quarter revenue grew 42% year over year as the number of active buyers jumped 33%, and spend per buyer also increased 20%. Fiverr raised its full-year revenue guidance by about $10 million at the midpoint, though the latest outlook remains lower than the guidance management had originally offered in the first quarter.
Fiverr is investing more in its international expansion and recently acquired freelancing network Working Not Working while upgrading its own services to include a premium fee-based seller's program.
The company pegs its U.S. addressable market at $115 billion per year and as much as $750 billion globally, and it should benefit from the network effect of expanding its internet retail platform as more content creators sign on.
Image source: Getty Images.
Bear case: Generating losses while risking market saturation
Keithen Drury (Bear): The whole world can't become freelancers. At some point in time, this work style will become saturated, and growth for Fiverr will be hard to come by. Businesses need most employees solely committed to the job rather than bouncing from opportunity to opportunity. However, the amount of future jobs done via freelancing is anybody's guess.
The COVID-19 pandemic created a massive tailwind for Fiverr as millions of people found themselves jobless. Now that many businesses are hiring, Fiverr is beginning to experience some headwinds. During its third quarter, revenue decreased $1 million sequentially, a first for the company and a warning sign of what might lie ahead.
Fiverr has rarely reported GAAP net income, and it will not if it continues issuing as many shares for employee compensation as it does currently. While using stock to attract talent is common for young companies, the expense shouldn't be growing so much faster than its 42% revenue growth. Unfortunately for Fiverr, it is.
| Stock-Based Compensation | |||||
|---|---|---|---|---|---|
| Q3 2021 | Q3 2020 | Increase | YTD 2021 | YTD 2020 | Increase |
| $15,104 | $3,756 | 302% | $38,761 | $9,580 | 305% |
SOURCE: FIVERR. Dollar values in thousands.
Making matters worse, Fiverr is touting its nearly 10% adjusted EBITDA margin in the third quarter. However, if stock-based compensation grew at the same pace as revenue, Fiverr's adjusted EBITDA margin would have been negative 3% (assuming the same total level of compensation).
Another risk for Fiverr is clients taking contracts off its platform. If a company and freelancer have a great working relationship, they might bypass Fiverr and work directly with each other. Fiverr charges the buyer (the company) a 5% listing fee, and the seller (the freelancer) gets to keep 80% of the payout. By moving off the platform, the freelancers would make more and the companies spend less. If this occurs, Fiverr becomes more like a matchmaker rather than a true freelancing platform.
Fiverr presents an opportunity in a unique part of the economy, but it also has challenges that may or may not play out.
A fascinating company to watch
Clearly, there are plenty of reasons to be optimistic about Fiverr International's long-term prospects, but, rightly, there are reasons to be cautious too. Only time will tell whether Fiverr's strengths can help it become profitable or if its weaknesses will continue to hold it back.
