Israeli company Fiverr International (FVRR 2.51%) offers an online marketplace for freelance workers. If someone needs document editing, custom artwork, or video editing, they can browse through services listed by freelancers on Fiverr's marketplace.
Or they can get these services from an application that uses generative artificial intelligence (AI).
This is increasingly the dilemma for Fiverr: The rise of powerful generative AI apps would seem to upend its business model entirely. And this perceived existential threat to its business is part of the reason that its stock has dropped to near an all-time low (cheap) valuation, as the chart below shows.
FVRR PS Ratio data by YCharts
However, this is simply a prevalent narrative that may or may not be the reality. Indeed, Fiverr's management doesn't share the view that generative AI is an existential threat to its business. On the contrary, management believes that it can be a catalyst for growth in 2024. And it's not the only marketplace business that has this view.
How AI can catalyze growth
As of the third quarter of 2023, there were 4.2 million active buyers on Fiverr -- people looking for freelancers to do a job. However, these buyers have their work cut out for them. Fiverr's platform is big, with many listings. Finding the right freelancer at the right price is challenging.
AI can improve search results. In the third quarter, Fiverr launched Fiverr Neo, which the company says matches buyers to freelancers. Management says that Neo is a "Personalized recruiting expert that can help our customers more accurately scope their projects and get matched with freelance talent."
In theory, something like this will lead to better search results for Fiverr's buyers. And if buyers get better search results, they're more likely to buy and return in the future when they need more freelance work done.
NYSE: FVRR
Key Data Points
This isn't a clever attempt by Fiverr to rewrite the narrative; other marketplace businesses are talking about AI in the exact same way.
For example, Etsy (ETSY +0.56%) has 120 million listings on its platform for handcrafted and customized items -- that's a lot to go through. But the company says it's working on "the next frontier of search" by using machine learning to identify the quality of a listing, promoting high-quality listings to the top, and making personalized recommendations based on the data it has on the buyer.
As another example, Roblox (RBLX 6.57%) is a platform offering many different virtual experiences and games. It, too, is working on improving content discovery. In its third quarter of 2023, content recommendations were up 85% year over year, and this coincides with an acceleration of its revenue growth rate.
It's possible that Roblox's users are spending more and are more engaged because they're discovering more relevant content than ever before. And that's the hope for Fiverr's AI efforts: The idea is that buyers will have an improved platform experience, leading to more adoption and spending.
What does this mean for investors?
Looking at it from an investment perspective, Fiverr is sort of treading water. It will report full-year 2023 financial results on Feb. 22. But management expects full-year revenue growth of 8% at most, which isn't much. And it is expected to be pretty close to breakeven on the bottom line.
For this to be a good investment, Fiverr either needs better growth or better profitability -- ideally, it would have both.
This is why it's important to consider Fiverr's efforts to enhance its search functionality. If it can use AI to improve results, that could be something that allows growth to accelerate.
This will be something to look out for when Fiverr reports its financial results and sets financial guidance for the coming year.
