On Feb. 22, freelance marketplace Fiverr International (FVRR 4.90%) reported financial results, wrapping up 2022 and setting guidance for 2023. The market immediately celebrated the report, with the stock jumping that day.
But long-term investors aren't interested in a single day. They're wondering what the report means for the business and the stock going forward.
For Fiverr shareholders, the arrow might be pointing up more now because of an important development in the fourth quarter of 2022. That said, this investment is anything but a slam dunk, as I'll explain.
What's going right for Fiverr right now
Fiverr's business has grown immensely since its initial public offering (IPO) in 2019. However, its stock price has barely inched higher from where shares traded on their first day. And I believe that has a lot to do with the company's lack of progress on the bottom line.
For example, in 2019, Fiverr's operating expenses were a whopping 112% of revenue -- it spent more running the business than it brought in. By comparison, operating expenses were 109% of revenue through the first three quarters of 2022 -- a modest improvement, but hardly worth bragging about.
However, Fiverr made dramatic progress in Q4. Quarterly operating expenses fell to just 81% of revenue. And while that still left the company with a $2.2 million operating loss, that was a marked improvement from its operating loss of almost $14 million in the prior-year quarter.
Specifically, Fiverr's management reined in general-and-administrative expenses during Q4 (corporate overhead), with expenses for this line item dropping 53% year over year. For perspective, general-and-administrative expenses were up about 20% during the first three quarters of 2022 compared to the comparable period of 2021, including a 17% jump during the third quarter. The Q4 improvement, therefore, was sudden.
Why Fiverr stock still might not be a buy
With sky-high operating expenses and an extreme price-to-sales (P/S) valuation, investors were increasingly unwillingly to purchase shares of Fiverr, as its revenue growth rate slowed in recent quarters.
FVRR PS Ratio data by YCharts
However, things have changed for Fiverr. With a P/S ratio below 5, the stock is far more reasonably valued than in times past. And now that it's operating much closer to breakeven, some of the downside risk is off the table. That's encouraging, and it's why the stock jumped so much immediately after reporting Q4 results.
Value investors may be warming to the idea of an investment in Fiverr stock. But I think wisdom from value-investing king Warren Buffett is appropriate here.
In his 1992 letter to Berkshire Hathaway shareholders, Buffett wrote about low valuation metrics but said that they "are far from determinative as to whether an investor is indeed buying something for what it is worth." In other words, something that looks cheap now might not grow shareholder value over time. Growth and value are equally important concepts for investors to balance.
For 2023, Fiverr's management expects to grow revenue 8% year over year, at best. Therefore, its cheaper valuation seems to reflect its dwindling near-term growth prospects. And it's fair to wonder if the business can create enough value at that growth rate to outperform the stock market in the coming year.
Fiverr continues to see growth opportunities from attracting new buyers, getting buyers to spend more on average, and from expanding internationally. But in the near term, growth is challenged -- revenue for the first quarter of 2023 is only expected to be up between 0% and 2% before accelerating later in the year.
If you have strong insights or opinions on the long-term growth potential of the freelance market, Fiverr stock could be a good buy today, assuming better growth down the road.
However, for investors more skeptical about the long-term potential of the freelance market, it may be best to wait to buy Fiverr stock now, monitoring to see if growth indeed starts accelerating as management expects.
