Investors may struggle to formulate a strategy when it comes to Fiverr International (FVRR 3.74%). The marketplace connecting companies and gig workers has seen massive gains over the last four years that have almost entirely evaporated.
Indeed, investors have several reasons to be wary of the stock, and it's not just the business environment. Given these challenging conditions, investors should approach Fiverr stock with caution.
Fiverr faces deep uncertainty
The first culprit that often comes to mind when one sees a company like Fiverr struggle is the economy. Indeed, major economic indicators like interest rates and consumer spending have been at odds, resulting in companies trimming their budgets and cutting spending, actions that do not bode well for Fiverr.
However, investors cannot overlook a longer-term threat coming to its business model in the form of generative AI. Many questions remain in terms of how this technology will create or destroy jobs over time. But generative AI has become better at complex tasks like writing and coding, potentially reducing the demand for workers with these skills going forward.
Additionally, the geopolitical conflict in Israel could have an effect on Fiverr due to its domicile in Tel Aviv. The company conducts key activities like research and development, marketing, and general and administrative functions through its headquarters in the region (about 78% of its employees work from Israel). Though the stock initially surged higher when the conflict intensified earlier this month, many of Israel's tech workers are now on the front lines of an escalating war, and it is not yet clear how the conflict may ultimately affect the company's operations.
Fiverr's financials
Fortunately, not all of the news for Fiverr is bad. Despite its struggles, it collects more per transaction, and its take rate rose to 30.7% as of the second quarter. Both buyers and sellers are adopting more of the company's value-added services on the platform, mitigating the declines caused by other headwinds.
Still, a better take rate only helps so much. Through the first half of 2023, revenue of $177 million was up just 3% year over year.
In that same period, Fiverr managed to boost its gross margin more than two percentage points, while its operating margin of negative 6% brought it much closer to breakeven. Consequently, the company reduced its net loss for the first half to just $4 million, including $227,000 of net income in the second quarter. By comparison, Fiverr lost $59 million in the first six months of 2022.
Moreover, the company is guided for accelerating growth in the third quarter with revenue up 8% to 12%. It will take sustained improvements to bring back investors, however, as Fiverr stock is still down 18% year to date.
Looking back to its 2021 peak, the stock has fallen over 90%. The sell-off has brought its price-to-sales (P/S) valuation, which once topped 50, to a modest 2.7. Fiverr also sports a forward price-to-earnings (P/E) multiple of 13, indicating the market may have oversold the stock.
Moving forward with Fiverr
At current levels, Fiverr may ultimately prove to be a bargain given the second-quarter net profit and its low valuation. But until investors can fully understand the challenges it faces on multiple fronts, they should only consider a small position in this company, assuming they can stomach the risk at all.
