If you invest in growth stocks, you've been taken on nothing short of a roller-coaster ride this decade. The COVID-19 pandemic crash sent stocks plunging in February and March of 2020. This was followed by a bull run for the ages as the Federal Reserve and Capitol Hill pumped money into the U.S. economy at a furious pace in 2021. Last year, all three major indexes stumbled into a bear market, with growth stocks getting hit especially hard. Finally, in 2023, growth stocks are once again off to the races.
However, not all growth stocks have come anywhere close to regaining their 2021 highs, or even participated in the 2023 rally. One such supercharged growth stock, which has plummeted 91% from its all-time high set in February 2021, is a company I just added to my portfolio.
Image source: Getty Images.
While its stock is unquestionably broken at the moment, its growth story remains perfectly intact. Say hello to online-services marketplace Fiverr International (FVRR 3.74%).
Fiverr's unceremonious fall from grace
Before digging into the various reasons I chose to add Fiverr to my portfolio in the low $25s, let's take a closer look at the headwinds it encountered that, ultimately, sent shares from an intra-day peak of $336 in February 2021 to as low as $24 and change in the first week of July 2023.
The first problem for Fiverr is that its valuation never made a lot of sense when it was trading for north of $300 in early 2021. Even though the pandemic coerced people to work from home, the company's price-to-sales and price-to-earnings ratios were unbelievably high and simply couldn't be justified (e.g., 667 times trailing-12-month cash flow, as of the end of 2020). When the 2022 bear market arose, investors became unwilling to support growth stock with outsized premiums.
Another concern for Fiverr is its cyclical ties. Since Fiverr's freelancer marketplace is tied at the hip to the health of the U.S. economy and job market, any indication of economic weakness or the growing likelihood of a recession is likely to weigh on its share price. Over the past year or so, there have been no shortage of economic indicators, metrics, or probability tools sounding a warning about a possible U.S. recession.
The third issue for Fiverr, and the one that's, arguably, been most pervasive in 2023, is the belief that artificial intelligence (AI) will hurt its operating model. The emergence of chatbots, such as ChatGPT, demonstrate that AI may be capable of replacing humans in certain tasks. The inference is that Fiverr would see fewer freelancers and buyers on its platform, or those freelancers who are on its platform would potentially lose work to AI solutions in the future.
The last headwind I'll mention can be found on the company's income statement. Although Fiverr is profitable on an adjusted basis, it's still losing money based on generally accepted accounting principles (GAAP).
Image source: Getty Images.
Fiverr is a phenomenal value right now
These headwinds are all tangible concerns that shouldn't be swept under the rug by investors. However, there's a big difference between a temporary headwind and one that would alter the company's growth trajectory. None of the hurdles Fiverr is contending with fall into the latter category.
For example, one reason I was more than willing to take the plunge on Fiverr was because of the AI-driven sell-off. Though AI has an opportunity to be a game changer for a number of sectors and industries, history has shown that next-big-thing investments take time to mature. Over the past 30 years, the emergence of the internet, business-to-business commerce, genome decoding, 3D printing, blockchain technology, cannabis, and the metaverse are all examples of next-big-thing trends that formed a bubble and eventually popped. This isn't to say AI won't be a growth-driving trend for decades to come. Rather, expectations that it'll change the labor force overnight are grossly overstated.
But beyond just taking advantage of overblown AI concerns, I find three aspects of Fiverr's operating model irresistible.
To start with, we've witnessed what appears to be a permanent shift to the workforce in the wake of the COVID-19 pandemic. Although some folks have returned to the office, more people than ever are working remotely -- 29.3%, as of January 2023, compared to just 4.7% in 2019. Fiverr's gig-economy-driven platform, which connects freelancers with buyers, is ideally positioned to benefit from this shift.
The second differentiator with Fiverr International is its online-services platform. Whereas many of its peers, such as Upwork (UPWK 3.40%), have freelancers price their services at an hourly rate, Fiverr's freelancers are presenting their tasks as a packaged deal. Seeing as how the aggregate number of buyers and the average spend per buyer on Fiverr have been steadily climbing, businesses are clearly favoring the transparency of its all-inclusive pricing.
The third difference-maker between Fiverr and its peers is its take rate -- i.e., the percentage of each deal negotiated on its platform that it gets to keep, including service fees for both buyers and sellers. For instance, Upwork reported a take rate of 16% in the March-ended quarter and announced it would be doing away with its 5% take tier. Meanwhile, Fiverr's take rate clocked in at 30.4% at the end of the first quarter. Fiverr's take rate is nearly double its clearest competitor, yet it's growing both buyers and spend per buyer on its platform.
Lastly, the valuation makes sense given Fiverr's large addressable market and the fact that remote work is still in its early innings of growth. After recording $0.71 in full-year adjusted earnings per share (EPS) in 2022, Wall Street's consensus calls for $2.49 in adjusted EPS by 2026, with sales growth ranging between 10% and 20% per year. With the company trading at less than 15 times forward-year earnings and outpacing Upwork in many of the statistical categories that matter most, it looks like a no-brainer buy. That's why I added Fiverr International to my portfolio.
