With shares down 92% from an all-time high of $323, reached in February 2021, Fiverr (FVRR -0.75%) is one of several pandemic-era winners that rapidly lost Wall Street's favor as the economic situation normalized. But is the company's rock-bottom stock price a buying opportunity, or a warning for investors to stay far away? Let's discuss what the next five years could have in store for this battered business.
What went wrong for Fiverr?
Founded in 2010, Fiverr is an Israel-based freelancer platform designed to connect remote workers with people who need their services. Unlike rival platforms (such as Upwork), where clients post jobs and receive offers, Fiverr's talent offers services for a set price. This system streamlines the selection process, making Fiverr more convenient for both workers and clients.
Unsurprisingly, Fiverr's business model benefited during the COVID stay-at-home boom when small businesses lost access to in-person staff, and people turned to work-from-home to make extra money. However, at present the company has slowed down considerably.
Fiverr's first-quarter revenue increased by a modest 6.3% year over year to $93.5 million, which isn't much to get excited about. However, operating losses narrowed from $7.1 million to $4.1 million, which suggests the company is slowly moving in the right direction.
What will the next five years have in store?
Despite its alarming stock price declines and operating losses, Fiverr is in a relatively strong financial position. With over $370 million in cash and marketable securities on its balance sheet, bankruptcy isn't a present risk. And the company can probably maintain operations indefinitely without overreliance on outside sources of capital like debt or equity dilution.
In fact, Fiverr is so capital-rich that it can splurge on luxuries like share buybacks. In the first quarter, management authorized a share repurchase program aiming to retire $100 million worth of the company's stock. Investors often like buybacks because they can increase the fundamental value of the remaining shares relative to earnings and cash flow. However, in Fiverr's case, one shouldn't get too excited.
Image source: Getty Images.
Buybacks make the most sense when a company generates tons of profit. However, Fiverr is returning cash from its balance sheet, which could have been reinvested into its business or used to pursue synergistic acquisitions. The potential effect of the buybacks will also be canceled out by the company's share-based compensation, which totaled $19 billion in Q1 alone.
Over the next five years, Fiverr will need to focus on generating actual business growth instead of gimmicky buybacks, which can actually be value-destructive if the company's share price continues to decline.
Generative artificial intelligence (AI) is also a long-term headwind because it can allow clients to save money on tasks they would have previously needed a freelancer for. This challenge could become increasingly dire as AI technology improves over the coming years.
Is Fiverr stock a buy?
Despite enjoying modest revenue growth, shrinking losses, and a mountain of cash on its balance sheet, Fiverr stock is not a buy -- especially as improving AI technology erodes its business model.
The company's large buyback program isn't encouraging because it suggests management has run out of ideas for reinvesting in the business. Shares look likely to underperform the S&P 500 over the next five years and possibly beyond, so investors should stay far away.
