Shares of Fiverr (FVRR -1.17%) have not done well in 2021, sinking 42% year to date and 66% off their all-time highs. This has been primarily because many investors believed that Fiverr was only useful when the entire world was forced to quarantine during the COVID-19 pandemic. As lockdowns are becoming rarer, many investors no longer see a need for Fiverr.
The assumption that Fiverr is only a pandemic play is misguided, however. Fiverr is helping change how the world works, and as seen from The Great Resignation, it is clear that how people work is being greatly altered. This may take a while to become evident to the majority of investors, potentially meaning that shares of Fiverr might not recover in 2022. However, over the next five years, I think shares should recover and even pass their all-time highs again.
Image source: Getty Images.
Fiverr's path to success
A shift to increasing freelance work has occurred already. When people lost their jobs due to the COVID-19 pandemic in 2020, both employees and employers were forced to seek out gig work, and this trend is continuing today. Even with lockdowns behind us, buyers on Fiverr have increased to 4.1 million today, which is higher than the 3.4 million buyers it had in 2020. Additionally, employers are finding Fiverr more important than ever before: They are spending an average of $234 on it today compared to $203 in 2020.
This adoption might be due to the strong network effects that Fiverr has. With more freelancers on the platform, buyers have a wider range of choices to find work. This makes Fiverr more valuable for buyers, which then attracts more sellers. This cycle of strong demand and a need to be specifically on Fiverr has allowed the company to increase its take-rate on orders. In the third quarter, Fiverr's take rate increased 1.4% year over year to 28.4%.
To maintain these network effects, Fiverr has to create high-quality experiences on its platform. The company has already started doing this with personalization features for both sellers and buyers, like Fiverr Workspace. Workspace allows sellers to manage their work information and performance on one page. These personalization features will not only attract freelancers to Fiverr but also retain them on the platform, making Fiverr's service more valuable for buyers and keeping its network effect cycle thriving.
Another way that Fiverr is doing this is through its subscription offering. This subscription allows buyers to pay freelancers on a monthly, recurring basis for jobs, encouraging both buyers and sellers to actively stay on the platform -- giving Fiverr recurring revenue in the process.
As a result of these efforts, the company continues to see strong growth. In Q3, the company grew its top line 42% year over year, and Fiverr increased its full-year guidance. Its prior 2021 guidance was expecting $284 million in revenue for the year, but it is now expecting $294 million. While its Q3 net loss worsened year over year -- dropping from break-even in 2020 to a loss of $14 million in 2021 -- the company did increase its free cash flow. So far this year, the company generated $28 million in free cash flow.
The risks
Fiverr is not the only horse in this race. Its primary competitor has been Upwork (UPWK 0.90%), and now Microsoft (MSFT 0.46%) is joining the space by trying to bring LinkedIn into the freelance arena. If anything, Microsoft's push into this market shows that the freelancing movement is here to stay, and even though it no longer enjoys major growth from the pandemic, the industry will continue to be prevalent.
In the battle between Fiverr and Upwork, Fiverr has consistently come out on top for many years. Upwork is larger than Fiverr in terms of revenue, but Fiverr has grown its quarterly revenue 344% since 2018, compared to Upwork's 134% growth. Even year to date, Fiverr's 33% growth beats Upwork's 21%.
Will it recover?
There is no doubt that Fiverr saw substantial benefits from lockdowns, the pandemic, and the following variants, but those are not the only opportunities the company has. It is rapidly becoming a market leader and seeing much faster growth than its primary competitor. The company's network effects are retaining users, and that retention is attracting new and existing customers to spend more.
While its net loss is a concern, the company's high margins and sustained top-line expansion should allow its loss to improve over the next few years. While I am not sure if shares will recover in 2022, I do think that Fiverr will continue seeing strong growth in all aspects of its business in 2022. With consistently strong growth, it is only a matter of time before investors find Fiverr appealing again, and this moment could be a great opportunity to buy the dip.
I will be happy holding my shares today because I believe that -- while 2022 is uncertain -- this stock could flourish for the next five years.
