The market has been incredibly volatile over the last couple of years. Many companies that enjoyed soaring sales and share prices thanks to pandemic-related headwinds and the low-interest rate environment have had a tougher go of things lately.
Pandemic-driven demand has generally receded, and the combination of inflation and rising interest rates has crushed the market's appetite for growth stocks. But while market volatility continues to shape the trading backdrop in the near term, massive valuation pullbacks have also made it possible to invest in some worthwhile companies at opportune prices.
Read on for a look at a stock that -- down nearly 90% from its high -- could deliver massive long-term returns.
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Growth of the gig economy -- a massive opportunity
Fiverr International (FVRR -2.00%) operates a leading freelance labor marketplace, and the company is in a great position to benefit from the long-term growth of the gig economy. But you wouldn't exactly guess it from recent stock performance. The stock trades down about 89% from its high in 2021 even off about 10% from its market close on the day of its public debut.
After growing sales 88% in 2020's third quarter and 43% in Q3 2021, Fiverr's Q3 revenue increased just 11% year over year in its latest third quarter.
As illustrated in the chart below, the company's sales growth leveled off substantially in 2022. The waning of pandemic-driven tailwinds has led to a substantial sales growth deceleration, but the company's long-term expansion potential remains incredibly promising.
FVRR Revenue (TTM) data by YCharts
The gig revolution is still just heating up
In addition to bringing new workers and labor buyers on board its platform, Fiverr also has a big growth opportunity if it can continue to increase spending from labor purchasers onboard its marketplace. The company's platform offers value and flexibility for customers big and small, but attracting large customers represents a particularly appealing growth avenue.
There's good reason to believe that the company will have opportunities for big new wins on that front further down the line. Compared to hiring full-time employees, hiring on a freelance contract basis offers businesses and organizations the opportunity to cut down on office expenses, employee benefit costs, insurance, and other expenses.
This dynamic alone has the gig economy on track to see strong growth over the next decade and beyond, and Fiverr has an opportunity to facilitate and benefit from its expansion. Analysis from industry research estimates that global gig economy spending will reach $873 billion in 2027, up from $355 billion in 2021 -- good for a roughly 16.2% compound annual growth rate across the period.
A valuation that leaves room for plenty of growth
While Fiverr has posted small profits in recent years, there are signs that it will be able to shift into delivering more substantial earnings and long-term growth. Last quarter, the company posted a gross margin of 81.1%. While that was actually down from 83.3% in the prior-year quarter, performance along that metric was still very strong in Q3 2022 and bodes well for long-term earnings growth. Meanwhile, non-GAAP (adjusted) earnings per share grew roughly 10.5% to reach $0.21.
FVRR Market Cap data by YCharts
With big sell-offs pushing its market capitalization to roughly $1.3 billion, Fiverr is valued at approximately 35 times expected forward earnings and 3.5 times expected forward sales -- both of which look low for the company on a historical basis. Additionally, Fiverr has been doing a much better job of serving up profits lately than its chief competitor Upwork, which has been reporting losses.
In response to the tougher operating backdrop, management has shifted priorities away from expanding its sales base in order to generate stronger earnings and free cash flow, which seems like the right move at the moment. Macroeconomic headwinds may tamp down on sales growth in 2023, but the company has shown that it can respond flexibly to shifting market conditions, and its current valuation leaves room for explosive upside.
