Last year, pandemic-driven business closures led displaced workers to explore alternative means of employment, and many tried their hand at freelance jobs. Likewise, some remote workers found themselves with more free time, so they tapped the gig economy for supplemental income.
That made Fiverr International (FVRR -0.96%) popular with investors, and its share price skyrocketed 730% in 2020. But after peaking in mid-February, Fiverr stock has fallen sharply, and it currently trades 54% below its all-time high. In hindsight, that pullback isn't so surprising. In February 2021, Fiverr stock achieved an astronomical valuation of 56 times sales -- nearly 10 times higher than its price-to-sales ratio prior to the pandemic. Since then, a combination of analyst downgrades and weak guidance (relative to Wall Street's expectations) have conspired to bring the stock price down.
So is now a good time to buy Fiverr stock? Here's what you should know
Image source: Getty Images.
Fiverr has a strong business model
Fiverr brings an e-commerce-like experience to freelance work. Its platform is a marketplace that connects buyers (businesses) with sellers (freelancers) of digital services, and its product catalog comprises over 500 gig categories, including popular ones like graphic design, web development, writing, editing, audio, video, and animation.
On the seller side, Fiverr helps freelancers build profiles, list skills, and showcase past work, and it provides value-added products like Fiverr Learn, a training platform featuring on-demand videos led by experts in various fields. Fiverr has also made acquisitions to expand its portfolio of freelancer services, including its purchase of content marketing specialist ClearVoice and task management platform And.co (recently rebranded as Fiverr Workspace).
On the buyer side, Fiverr enables businesses of all sizes to search, browse, and buy digital services from freelancers. The company also leans on artificial intelligence to provide personalized recommendations, making the process easier for buyers. More importantly, as its platform captures more data (seller profiles, transactions, user behavior), Fiverr's ability to rank and recommend relevant freelancers should improve, powering the network effect that drives its business.
Impressive financial results
Fiverr has become an important gateway to the gig economy. There are currently 4.1 million active buyers on its platform, and active spend per buyer jumped 20% to $234 over the past year. Moreover, Fiverr's take rate (revenue divided by total transaction value) reached 28.4% in the third quarter, up from 27% in the prior year. To put that in perspective, rival Upwork saw its take rate fall to 14.2% in the most recent quarter. That enormous discrepancy highlights Fiverr's ability to create value for users.
Not surprisingly, the company is growing its top line quickly.
|
Metric |
Q3 2020 (TTM) |
Q3 2021 (TTM) |
Change |
|---|---|---|---|
|
Revenue |
$163.2 million |
$273.8 million |
68% |
Source: YCharts. TTM = trailing-12-months.
As a caveat, Fiverr is unprofitable on a GAAP basis, and its net loss widened to $45.3 million through the first nine months of 2021, a significant change from a net loss of $6.6 million through the same period last year. That being said, it makes sense to invest in growth right now, so I'm more focused on free cash flow, a non-GAAP metric.
To that end, the company produced $31.5 million in free cash flow over the last 12 months. That's encouraging because it means Fiverr is generating enough cash to pay the bills. And eventually, the company's impressive take rate -- which has kept its gross profit margin above 80% since 2018 -- should translate into strong profitability.
Going forward, Fiverr puts its addressable market at $115 billion, and the founder-led management team is executing on a strong growth strategy: adding more buyers and sellers, growing its catalog of gigs, and expanding into new geographies. Fiverr is also looking to move upstream, as evidenced by its recent acquisition of Stoke Talent, a freelancer management platform for larger businesses. That move should also make Fiverr a bigger player in the offline freelancing market, which is still orders of magnitude larger than the online market, according to management.
Why Fiverr is a smart buy now
During the height of the pandemic, investors were throwing money at Fiverr, which pushed its share price to outrageous highs. However, after falling 54%, the stock now trades at 19 times sales, a more reasonable valuation. Even so, I think many investors still view Fiverr as a "COVID stock," meaning they expect its business to falter as more workers return to the office. But nothing could be further from the truth, and those short-sighted expectations create an opportunity for long-term investors.
Case in point: The global freelance platform market is expected to grow at 15.3% per year through 2026, according to Orbis Research. That means the rise of the gig economy is a lasting trend, not a passing fad. And Fiverr is more than a pandemic play -- it's a company reshaping the way people work. From that perspective, this stock does indeed look like a smart buy right now.
