When the COVID-19 pandemic revolutionized the way we work overnight, shares of businesses that help folks work independently skyrocketed higher.
Unfortunately, the giant gains didn't last long for Fiverr (FVRR 4.07%) investors. Shares of the gig-economy stock collapsed by 74% in 2022.
Its stock price is in the dumps, but Fiverr's underlying business is stronger than ever. Let's measure this stock's advantages against the reasons it tanked to see if it's a smart buy at recent prices.
Reasons to buy Fiverr
In a recent survey from McKinsey, the percentage of Americans who work independently has risen sharply, to 36%. This figure was just 27% in 2016.
Many of those newly independent workers offer their services on Fiverr's platform, a digital marketplace for over 550 categories of freelance services. It's increasingly popular with businesses of all sizes because it makes shopping for freelance services as straightforward as shopping for consumer goods on an e-commerce platform like Amazon.
Fiverr's service works so well for buyers that it can retain a portion of total payments for freelance work, similar to traditional staffing solution providers. The company's take rate rose to 30% in the third quarter, from 28.4% a year earlier.
Despite fears of a macroeconomic slowdown, businesses are still flocking to Fiverr's platform to find freelance workers. The number of active buyers on the platform reached 4.2 million in the third quarter. That's 3% more than a year ago and nearly double the number of active buyers three years ago.
More buyers signing up during a global economic slowdown isn't the only sign that Fiverr's leading the powerful trend toward independent employment. The average buyer on the platform spent 60% more in the third quarter than they did a year ago.
Fiverr's market valuation has fallen from more than 45 times trailing sales in early 2021 to just 3.2 times trailing sales at the moment. This downtrend now is a little surprising because the company is finally approaching sustainable profitability. Management expects adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to come in at $22.5 million for 2022. That works out to 6.7% of total revenue.
Reasons to remain cautious
Fiverr's take rate might be a little too good. The company's quick to point out how many active buyers are on the platform, but the number of active sellers is another story.
Before going public, Fiverr reported 255,000 active sellers on its platform during the 12 months that ended on March 31, 2019. Since going public, though, management stopped reporting this figure. Fiverr isn't shy about sharing its achievements, so investors have to assume active seller numbers have been kept under wraps because they aren't flattering.
Fiverr can report adjusted earnings, but it's still losing significant amounts of money, according to generally accepted accounting principles, or GAAP. It finished September with about $376 million in cash and marketable securities, after losing $70 million in the first nine months of 2022.
FVRR Revenue (Quarterly) data by YCharts
Fiverr's valuation has fallen hard in recent years, but investors should understand that it could fall much further in 2023 if revenue continues to slide. Quarterly revenue peaked at $86.7 million during the first three months of 2022 and fell to $82.5 million in the third quarter.
A smart stock to buy now?
Fiver's 30% take rate is impressive, but it probably can't rise much further before top-quality freelancers find less expensive solutions. Without this lever to pull, achieving profitability in 2023 could be harder than investors expect.
In 2022, management turned its focus toward cost efficiency, which put Fiverr on a path toward profitability. Before taking a risk on this stock, it might be a good idea to wait for another quarter or two to make sure the plan can succeed.
