Fiverr International: Bear vs. Bull

Fiverr International (FVRR -0.96%), an online marketplace for gig economy workers, went public on June 13, 2019 at $21 per share. Its stock started trading at $26, ended its first day at $39.90, and eventually hit an all-time high of $323.10 on Feb. 12, 2021.

The bulls were initially impressed by Fiverr's robust growth, which accelerated throughout the pandemic as more people accepted freelance and contract jobs. The buying frenzy in meme and growth stocks in early 2021 amplified those gains.

But over the past year, the bulls retreated as Fiverr's growth cooled off in a post-pandemic market. Rising interest rates popped its bubbly valuations, and the bears drove the stock back down to $28. In other words, a $1,000 investment in its IPO would have blossomed to more than $15,000 before withering to about $1,300 today.

Does that steep pullback represent a good buying opportunity for investors? Let's review the bear and bull cases to decide.

Image source: Getty Images.

What the bears will tell you about Fiverr

The bears will point out that Fiverr's growth has slowed to a crawl in a post-pandemic world. Its revenue rose 77% in 2020 and 57% in 2021 as more people accepted remote, freelance, and contract jobs, but grew just 13% in 2022 as the pandemic ended. For 2023, it expects revenue to only rise 5% to 8% as that slowdown continues.

For reference, Fiverr's competitor Upwork (UPWK -0.89%) grew its revenue by 24% in 2020, 35% in 2021, and 23% in 2022. In 2023, it expects its revenue to rise about 7% as it faces the same post-pandemic headwinds as Fiverr.

Fiverr only generated about half as much revenue as Upwork in 2022, but it only expects to grow at a comparable rate to its larger rival in 2023. It's generally a bearish sign when an underdog isn't growing faster than the market leader.

The bears also believe that Fiverr, Upwork, and their peers will be disrupted by the rise of "generative AI" artificial intelligence platforms like ChatGPT -- which could potentially displace a wide range of jobs across the writing, media, coding, and design industries.

Lastly, Fiverr is still unprofitable on a generally accepted accounting principles (GAAP) basis. Its net loss widened from $15 million in 2020 to $65 million in 2021, then widened again to $72 million in 2022. Its high debt-to-equity ratio of 2.4 also doesn't give it much room to raise fresh cash at reasonable rates in this tough market.

What the bulls will tell you about Fiverr

The bulls will tell you that even though Fiverr faces near-term headwinds, its adjusted gross margin remains stable and its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margins are still expanding.

Between 2020 and 2022, Fiverr's adjusted gross margin only dipped slightly, from 83.7% to 83%, as its adjusted EBITDA margin rose from 4.8% to 7.2%. By comparison, Upwork posted a negative adjusted EBITDA margin in 2022.

Fiverr's margins expanded as it laid off about 8% of its employees last year, streamlined its business, and executed other cost-cutting measures. For 2023, it expects its adjusted EBITDA margin to expand to 13.5% to 15.3%. That's a lot higher than Upwork's expectations for an adjusted EBITDA margin of 5.5% to 6% for the full year.

Furthermore, Fiverr's take rate, or the percentage of each transaction it retains as revenue, continues to rise as its growth in active buyers and spending per buyer cools off -- which indicates it still has plenty of pricing power against its competitors.

Data source: Fiverr. YOY = Year-over-year.

As for the rise of AI writers, coders, and designers, Fiverr's CEO Micha Kaufman said the company doesn't expect "AI development to displace the need for human talent" during its latest conference call. Instead, Kaufman believes the AI boom will spur the growth of new job positions, such as "verifying and editing" AI-generated content. In preparation for that shift, Fiverr recently launched a dedicated AI services category to host those positions.

Fiverr's growth might remain sluggish this year, but its stock seems reasonably valued at four times this year's sales and 25 times its adjusted EBITDA. Upwork trades at three times this year's sales and 33 times its adjusted EBITDA.

Which argument makes more sense?

Fiverr's growth should stabilize after it fully laps its pandemic-induced growth spurt, and its rising take rates and adjusted EBITDA margins suggest its business is sustainable. It's cheaper than its closest competitor Upwork, but it's also easy to find other tech stocks that are growing at faster rates and trading at even lower valuations.

So for the time being, I believe the bearish case against Fiverr still makes a bit more sense than the bullish one.