Pandemic-related dynamics helped catapult some companies to higher levels of success. Fiverr International (FVRR -1.44%), a business that runs an online marketplace for freelancers, was one of them. But like other so-called "pandemic stocks," Fiverr's shares have been southbound for the past year, and the company is now trading near its 52-week low.
That said, there are good reasons to be optimistic about the company's future. Let's see why Fiverr is well positioned to ride the wave of the next bull market.
The rise of the gig economy
Fiverr's platform connects freelance workers with individuals and businesses looking for quick and relatively cheap labor.
Users on the platform can bid on jobs starting at as low as $5 (hence the company's name). During the early days of the pandemic -- when government-imposed lockdowns were still in effect most places worldwide -- these services soared in popularity. But while the events of the past two years may have helped increase the adoption of these business arrangements, they aren't just some pandemic trend that will soon fade into insignificance.
Consider how Fiverr's services benefit both freelancers and businesses. The latter can gain access to skilled workers and hire them to complete tasks much more quickly than they would if they had to hire employees. Formally onboarding personnel onto their teams would also be a lot more expensive: Employees are entitled to various benefits such as paid time off and sick days. Freelancers propose a fee for a job, which businesses are free to accept or reject.
On the other side of the equation, freelancers get to advertise their skills on Fiverr's platform and potentially make money relatively quickly. Some do it as a side business, while others do it full-time. Offering one's labor on a platform like Fiverr and partaking in the gig economy also affords a degree of flexibility. Freelancers aren't tied to a specific job or an office, which allows them some freedom, something many enjoy.
Since all parties in the transactions Fiverr helps facilitate benefit from them, there is an excellent chance that the company's platform is here to stay. And there is plenty of runway ahead. Fiverr estimates a total addressable market (TAM) of $247 billion in the U.S. alone. But any market worth anywhere close to $247 billion will attract plenty of players.
For Fiverr to carve out a solid space for itself in this lucrative space and remain a leader in the long run, it will have to create a competitive advantage. Thankfully, it seems to be doing just that.
Building a strong moat
Fiverr's platform is an excellent example of the network effect. The more its ecosystem attracts users, the more valuable it becomes. Consider it from the perspective of businesses first. Having a large set of freelancers from which to choose forces workers to offer the best possible quality at the lowest possible price. That in itself is likely to attract even more companies onto the platform. The same is true for freelancers.
The more companies are plugged into Fiverr's ecosystem, the more potential business partners are at the disposal of freelancers. With more people using this service, everyone wins. In the second quarter, Fiverr's active buyers grew by 6% year over year to 4.2 million. Upwork, a competing platform, ended the second quarter with 807,000 active clients (the equivalent of Fiverr's active buyers), equating to an 11% year over year increase.
In other words, Fiverr is well ahead of one of its largest competitors in this category, although it grew this metric slower during the second quarter. Upwork also generates more revenue than Fiverr.
FVRR Revenue (Quarterly) data by YCharts
That is partly because Fiverr deals with smaller-scale transactions between companies and freelancers. Furthermore, Upwork offers various contractor management services (including payroll). Despite these differences between the two, Fiverr is competitive in its own niche. And it can continue attracting new members to its ecosystem. That will work wonders for the tech company down the road.
Riding out the storm
In the second quarter, Fiverr's revenue increased by 13% year over year to $85 million. The company's revenue growth rates have dropped partly as its pandemic-related tailwinds have subsided.
FVRR Revenue (Quarterly YoY Growth) data by YCharts
Also, Fiverr isn't profitable yet; it reported a net loss of $41.9 million during the period, compared to a net loss of $13.3 million in the year-ago quarter. Still, the company's revenue is a minuscule fraction of its TAM. And although it will keep on dealing with competitors like Upwork, even grabbing a 1% share of its TAM would multiply its trailing-12-month revenue of $325.77 million by more than seven.
The company's opportunities are massive, so investors should ride the current storm and stick with this tech stock. Fiverr's shares could deliver market-beating returns for years to come once broader macroeconomic challenges subside and pandemic-related dynamics recede.
