If you invested $5,000 in the 2019 initial public offering (IPO) of freelance marketplace Fiverr International (FVRR 3.74%), you'd have about $5,297 today, even though the company has grown immensely in many key performance metrics over the past four years.
This article will look at Fiverr's journey as a public company so far and offer some explanation for why this might be a stock for watching rather than buying right now, even though it's trading at one of its most reasonable valuations ever.
A look at Fiverr from 2019 to now
Fiverr went public at $21 per share, but it ended its first day of trading at almost $40 per share, which is about where the stock trades as of this writing. Even though the company was unprofitable according to generally accepted accounting principles (GAAP) at the time, investors were nevertheless excited by the company's high-growth potential.
Fiverr is a marketplace where sellers can set their own prices for freelance jobs. Then buyers come to the marketplace looking for freelance help and make purchases much like any other e-commerce experience. Therefore, watching buyer and seller trends is important for Fiverr investors.
At the time of its June 2019 IPO, Fiverr had 2.1 million active buyers on its platform. It also had 255,000 active sellers. However, partly due to the pandemic, these numbers have increased dramatically. Fiverr had 4.2 million active buyers as of the end of the third quarter of 2022. And while the company hasn't updated its active seller number, management did say it's at a "record level."
Fiverr generates revenue by taking a 20% cut from sellers and adding a 5.5% service fee to buyers. Moreover, it's diving deeper into providing services like analytics and ads to sellers, boosting its revenue even more. In fact, all of this adds up to give Fiverr a take rate that just surpassed 30% in Q3 -- incredibly high for a marketplace business.
By growing its user base and increasing its take rate, Fiverr believes it will generate up to $340 million in full-year 2022 revenue. For perspective, its revenue in 2018 was a mere $75.5 million.
Fiverr: 2023 and beyond
Fiverr has experienced sensational growth as a public company. And yet it's losing to the market. Therefore, I'm sure investors are wondering two things. First, can the company keep growing? Second, if growth hasn't led to market-beating returns so far, will growth lead to market-beating returns in the future?
To the first question, I'm personally doubtful about how much the freelance industry can grow as a whole. According to the 2022 American Opportunity Survey by McKinsey, 36% of U.S. workers say they're already independent. Fiverr's management believes this surging percentage of the workforce points to future gains. But to me, it feels like a large portion of workers are already freelancing, leaving me to wonder how much more the participation rate would grow.
That said, there doesn't necessarily need to be industry growth for Fiverr to grow its business. For example, active buyers only spent $150 on average annually when the company went public in 2019. As of Q3, buyers were spending $262 on average. This number can go higher still, in my opinion, with higher-value services provided by freelancers and also from inflation -- it's only reasonable for freelancers to raise their prices to cover cost increases.
Since Fiverr charges a percentage from transactions, its revenue would go up if sellers charge higher prices over time.
To the second question regarding whether Fiverr stock can beat the market from here, the company does have one thing in its favor now that it didn't have at the time of its IPO. When shares popped on their first day, Fiverr was trading at around 13 times trailing sales. And in 2021, it surged past 50 times trailing sales. That's an extreme valuation that has since dropped to more reasonable levels -- it currently trades at a price-to-sales valuation of just 4.
With growth opportunities and a far more reasonable valuation, the final wildcard for Fiverr is whether it can generate profits. Through the first three quarters of 2022, its net loss was $1.91 per share, much worse than its net loss of $1.27 per share in the comparable period of 2021. With profits headed the wrong way, I don't think it's any coincidence that Fiverr stock is losing to the market.
As a public company, Fiverr's management hasn't reined in operating expenses, something that will have to happen at some future point if this will be a market-beating investment, in my opinion. So far, management hasn't signaled a meaningful shift in thinking in this regard. Therefore, this is probably a stock many investors would prefer to watch from the sidelines for now.
