The COVID-19 pandemic breathed life into almost any company that had to do with e-commerce or digital transformation. Fiverr Internal Ltd. (FVRR -1.18%) is one such company. Fiverr is a marketplace for freelancers. It mainly earns its revenue by providing support services to sellers and charging commissions on purchases on its platform. The company has been a true growth story for some time now, but recent market volatility may have lifted valuations to elevated levels.
Source: Fiverr
The stock has recently seen some stellar performances soaring as high as $262 per share from pre-pandemic lows in the mid $25 range. This lead to many questioning the stock's valuation, but recent negative market sentiment has brought the stock back down to a more modest range which begs the question -- is Fiverr a good buy at today's prices?
More than just a speculative play
While valuations have been stretched for an extended period, Fiverr has quietly gone about its business in an expert manner. It's a true growth story. The company is a dominant player in its niche, and its market is developing quite rapidly. It has notable competition in large institutions like Upwork and Meta Platform's (META 0.55%) Linkedin. Still, the fact that its addressable market has been increasing has allowed the company to grow without having to be drawn into a battle of attrition with other major players. Second, Fiverr has an extreme focus on the customer. The company understands that a satisfied customer is a repeat customer and a repeat buy is very valuable to its business .
Buyer retention trend
The leadership team has been very deliberate about how they drive favorable outcomes. Fiverr uses data segmentation to "get to know" its customer and connect them with the right seller on the buyer's side . The company drives positive results by monitoring customer satisfaction scores and providing sellers training services to help them meet market demand. This approach has lead to very sticky customers, and you can see from the chart below active buyer figures are trending positively .
Source: Fiverr
Fiverr looks beyond the one-time transaction. Put another way, it views customers through the lens of their lifetime economic value to the firm. Fiverr must ensure that its business encounters are favorable to realize that value. We can see that the company has been doing an excellent job of this as spending per buyer trends have been promising.
Source: Fiverr
This approach means Fiverr has a solid base of repeat buyers allowing the leadership team to be tactical about customer acquisition strategies. In the calendar year 2021, it amassed an impressive 59% of its revenue from existing customers, which is a testament to its ability to court profitable long-term relationships.
Source: Fiverr
The talent cloud
But Fiverr is not resting on his laurels. The company is on the verge of yet another paradigm shift. Rather than being just a marketplace, Fiverr wants to build out what it refers to as the talent cloud. The company is focusing on attracting what it calls high-value buyers. It aims to do this by targeting B2B business deals and by penetrating what they refer to as the offline freelancing market. Fiverr claims that penetration of this market by online providers is still in its early phases; figures as low as 5% penetration have been thrown around. To do this Fiverr plans to build out what it calls the talent cloud, which will be a complete business solution to B2B freelance needs .
Fiverr expects freelancing to be 50% of the workforce by 2030, but I don't buy into this outlook. As the company penetrates the offline freelancing market, it will likely face new headwinds. One of my primary concerns as an investor is the lack of standardization in company protocols. Companies tend to have unique ways of doing things. Put another way, project management at Apple is unlikely to be like project management at Amazon. Also, resource availability could be a concern as 1099 contractors come to work as needed and at will. It is unlikely that a company would be satisfied with a scenario where they have to compete for a critical resource when they can maintain one in-house.
The takeaway
When we examine Fiverr's valuation, the wheels begin to fall off even after the sensational drop in its stock price. Fiverr still has a price-to-sales ratio near 10, which implies the stock is still a bit pricey. The growth prospects are immense, but investors may want to hold off and wait for more attractive prices. There is simply too much good priced into the current price. With the Fed taking a hawkish approach, investors should try to find bargains when looking for growth plays. The leadership team at Fiverr is exceptional and the growth story is undoubtedly playing out but better prices may yet be on the horizon. I would hold off on purchasing now unless there is a sensational new development. The B2B talent cloud idea will likely be a game-changer for the company, but it would be best to wait until Fiverr or the freelancing market starts to penetrate the overall market better.
