Everyone wants to have the success story of buying a stock and seeing it multiply in value, creating returns that can carry a portfolio to life-changing wealth. But they're hard to find, requiring a quality business with the ability to grow for years. Good stocks are always out there, but great stocks can require patience.
Freelancing marketplace Fiverr International (FVRR 3.74%) could be the next "fat pitch" you've been waiting for. The stock has tumbled from its highs over the past year but has fundamentals to show that its earlier success was no accident. As a result, Fiverr could be one of the biggest winners over the next 10 years.
A thriving and growing marketplace
Fiverr operates a marketplace where freelancers can sell their services, including just about anything from copywriting to graphic design. Fiverr's platform provides all of the frameworks for buyers and sellers to communicate, exchange services, and pay. The company takes a percentage of the transaction as revenue.
Image Source: Getty Images.
Fiverr gets more than 50 million monthly visits, which is exposure that freelancers could only dream of on their own, so the platform gives sellers a ton of value. The platform is growing, too, with active buyers increasing from 2.4 million in 2019 to 3.4 million in 2020 to 4.2 million in 2021.
The company is not only bringing more buyers to the platform, but it's also investing in broadening its appeal to larger customers like enterprises. They can hire task-specific talent instead of investing in hiring full-time employees, which costs more money. In late 2021, Fiverr paid $95 million in cash to acquire Stoke Talent, which lets companies build and organize a directory for freelance talent. Fiverr's focus on enterprises shows up in the company's spend per buyer, which has increased from $170 in 2019 to $242 in 2021.
This strategy shift adds to already-solid revenue growth; Fiver's revenue grew 57% year over year in 2021 to $298 million, with room to grow for years in a highly fragmented, massive freelance industry. Management estimates the U.S. opportunity alone is worth $115 billion.
Attractive financials that should keep getting better
Fiverr is already profitable on a non-GAAP basis, which is excellent for a company with so much growth. The company generated earnings per share (EPS) of $0.60 in 2021, and analyst estimates expect that to grow 24% year over year to $0.75 this year.
The company's expenses, like research and development, sales and marketing, and general and administrative costs, have become a smaller percentage of revenue from 2019 to 2021. In other words, Fiverr's revenue is growing faster than its spending, which is how it's become profitable.
A profitable company won't have to raise more cash to operate its business, which means it won't dilute investors' holdings by creating more shares of stock. This setup may change in the event of a major acquisition, but the company itself is financially sound. Fiverr's profitability means that it should be able to add cash to its balance sheet, making it possible for the company to initiate share repurchases or spend on an acquisition to grow its business further. All of these are good for shareholders.
Small companies for significant returns
Fiverr's small size separates it from many other quality stocks. Its market cap is just $3 billion, which leaves room for the company to grow over the years to come.
You can see in the chart below how Fiverr's valuation via its price-to-sales (P/S) ratio ballooned in early 2021. It's been a tough year for investors, but the good news is that the balloon has lost most of its air. Fiverr's valuation is now a P/S of 10, roughly on par with its pre-pandemic level. This modest valuation means that the stock should reflect most of Fiverr's long-term growth in its share price.
FVRR PS Ratio data by YCharts
For example, let's say that Fiverr grows revenue at an average of 30% per year over the next decade; management is forecasting about 27% revenue growth in 2022, but that's on the back of a substantial 2021 when revenue grew 57%. That would put its revenue at roughly $4 billion by year 10. If the P/S ratio of 10 holds, that will give Fiverr a $40 billion market cap, more than a tenfold increase from its current valuation.
Nothing is guaranteed, but it's much easier for a small company like Fiverr to grow than Apple, already a multitrillion-dollar stock. The ride may be bumpier along the way, but small stocks offer an easier path to significant long-term returns. Fiverr has the room to grow, the strong financials, and the small size to win big through the 2020s.
