Description

Business Overview

Fiverr is a two-way marketplace which aggregates freelancers and businesses (service consumers) to interact and conduct business. Fiverr follows the “aggregator” business model first theorized by Ben Thompson – and applies it to the massive and growing gig economy. Unlike traditional staffing platforms, Fiverr operates a “service-as-a-product” model, providing a transactional marketplace where freelancers’ services are listed in a catalog that buyers can search and purchase from.

From a monetization perspective, if a seller lists a service for $X on the platform, the buyer pays $X + 5.5% (orders under $50 pay +$2). Fiverr holds the funds in Escrow for 14 days before paying the seller $0.8X (20% cut).

The company has a strong brand presence (a driver in flywheel businesses) - buyers have a net promoter score (NPS) of 67 and sellers have 81.

Industry Overview

The freelance industry is vast and growing rapidly as traditional workplace dynamics become disrupted.

Estimated US total freelancer income in 2020 was estimated at $815B; Fiverr competes within an addressable market of $115B. 80%+ of freelancer transactions are still happening offline. 59M Americans are now freelancing which is 36% of the total workforce; that figure is estimated to exceed 50% by 2027. The freelance platform market is projected to grow at a 15.3% CAGR through 2026. COVID-19 created fundamental shift towards remote work and project-based employment

Investment Thesis

Summary: Fiverr’s addressable market is estimated at $115B and over 80% of freelance transactions still take place offline; that provides a lengthy runway for organic growth and provides us with conviction that there is enough space for there to be multiple winners. Network effects result in a virtuous cycle ultimately resulting in more transactions and revenue for the platform; this provides a strong economic moat for the firm to not only scale but also defend against new entrants. FVRR’s underappreciated move up-market, movement in customers’ propensity to pay, scaling revenue from new cohorts and a mix shift towards Fiverr Business drives conviction in a 11.2% variance from street for SPB by FY26E. Street fails to get granular with the drivers of take rate expansion; breaking them out shows overlooked growth in service-based revenue that will drive outperformance. At its current price, Fiverr provides an attractive return profile across a variety of assumptions and exit scenarios; valuing a company still growing at 20% with 20%+ EBITDA margins in 2026 at 5.0x EV/Revenue is a bet I am comfortable making.

Variance in Spend per Buyer (SPB) 

Some analysts believe that Fiverr will struggle to finding product market fit within the upmarket space, while simultaneously catering to their core SMB business. Consensus figures imply that FVRR is at a downward inflection point in SPB growth, which we believe discounts FVRR ability to successfully execute in moving up-market.

There are several up-market tools which provide conviction in the successful execution of moving upmarket:

●        Fiverr Pro: Professionals are hand-picked and vetted by Fiverr team with a $100 minimum spend. Encourages larger, more prestigious jobs to take place on Fiverr, driving higher SPB through price.

●        Buyer Subscriptions: Enables transactions to shift towards more long-term work, driving higher SPB through volume. As of latest quarter, 20% of subscriptions have a duration of 6+ months.

●        Fiverr Business: Core enterprise level resources for teams, enables teams to manage freelance order in scale. Three quarters after launch, grew to represent 5% of core marketplace business.

Cohort analysis uncovers a structural shift in propensity to pay:

Both incremental revenue from new cohorts and propensity to pay move upwards as time progresses. Any net dollar retention is additional value atop the growing incremental revenue from newer cohorts, making for two avenues of growth. Older cohorts, 2018 or older, enjoyed over 110% revenue retention in 2021. It is proven that as cohorts age, they progressively increase their propensity to pay, driving a tangible roadmap for SPB outperformance.

A mix shift towards Fiverr Business drives variance in the model:

Variance in Take Rate 

Bear view: One of the bear theses surrounding Fiverr is that their marketplace take rate is unsustainably high when compared to players like Upwork (28.4% vs. 14.2% as of Q3 2021). The argument is that this difference will either cause Fiverr sellers to go to Upwork or leave the platform entirely.

My view: Fiverr provides a variety of benefit to sellers on the platform, especially for low value gigs, because of their ability to aggregate demand and deliver it inbound. Think of the 20% seller cut as CAC — it allows them to fix their Return on Ad Spend at 5x to perpetuity (ex. Facebook ads have diminishing returns due to targeting). For both buyers and sellers, Fiverr provides functionality and trust to legitimize the transaction i.e., holding funds.

Additionally, Upwork’s model is fundamentally different from Fiverr - we should not see convergence in their take rates. While Fiverr platform has buyers reach out to freelancers (inbound), Upwork’s freelancers purchase “connects” which they then use to apply to jobs. Sellers either apply directly or hope to get chosen by Upwork’s matching algorithms, at which point they are invited to make a bid for the job in question. Upwork is not a demand aggregator and as such, their take rate reflects the auction process and outbound nature of finding gigs.

Subscription revenues will also drive outperformance in the model:

Fiverr Business leads to greater SPB, but it also has a subscription component for $149 / year; users are given a 12-month free trial but as it was launched in September 2020, its impact will be meaningfully felt starting in 2022E. The subscription parts of the business and promoted gigs will meaningfully expand the take rate in future years; management could possibly choose to break out non-transaction revenue to help investors better understand growth dynamics.

Breaking out the drivers of take rate expansion over the holding period granularly provides color into the drivers of Take Rate outperformance, something street overlooks.

Fiverr’s proliferation of service revenue is a move towards a larger narrative: FVRR is evolving from a traditional marketplace towards a platform. Every incremental service revenue stream is a push towards management’s long-term vision by building the foundations for its ecosystem. The following is the take rate bridge for 2020-2026E.

Conviction in Terminal State of the Business and Industry

We have strong conviction that either i) the freelancing marketplace industry won’t be winner-take-all thanks to the white space and under penetration by all players, or ii) even if it is winner-take all, we are betting on the right horse based on primary data and future growth.

There’s Enough White Space in the Industry for Both Fiverr and Upwork to be Winners…

Given the fragmented and underpenetrated nature of the industry, we believe there is enough white space for multiple winners in the long-term — especially given that Fiverr and Upwork have different core end-markets.

And If Not, We Think We’re Betting on the Right Horse

The long-term direction the freelancing industry is headed in favours FVRR (developing international markets). FVRR is penetrating UPWK share (Fiverr Business) better than vice versa. Core transaction take rates are a function of market dynamics, and the seller surplus on FVRR demonstrates i) strong lock-in and ii) strong value proposition for all parties.

Valuation

Fiverr’s valuation will be driven by its top-line story for the foreseeable future, operating leverage means EBITDA will grow meaningfully as the firm matures; case summary shows asymmetric upside.

Potential risks:

● Pre-Covid Growth Slowdown: Platform growth during COVID-19 was temporary and many users will churn, revenue growth will decrease

● Buyers Circumventing Platform: Buyers and sellers become dissatisfied with the take rate and leave complete gigs offline despite the marketplace

● Competitive Disruption: LinkedIn recently announced its Service Marketplace launch, new blockchain-powered platforms offer 1% take rates

● Lack of True Operating Leverage: Much of Fiverr’s growth has been premium & CAC-driven, where growth is tied to S&M spend

What am I Betting On?

● Fiverr can successfully execute on moving up-market such that Fiverr business users make up 6.0% of the buyer base

● Current transaction take rates won’t meaningfully compress as the FVRR platform demonstrates strong seller lock-in and continued value proposition for both buyers and sellers ▪ Service revenue has a strong runway for growth and will make up 16.7% of FVRR’s overall 2026E revenue vs. 14.0% (street)

● Fiverr can capture 16 bps of market share in the online freelancing TAM to reach 0.42% by 2026E, vs. 0.53% for UPWK

● Steady terminal state of the business being driven by the long-term direction of freelancing favouring FVRR (developing international markets) and FVRR’s ability to penetrate UPWK share better than vice versa

● An online marketplace growing top line at 20%+ and with a 23% EBITDA margin will be trading at 5.0x EV/Revenue in 2026E 

Catalyst

Future earnings beats/guidance revisions driven by SPG and take rate: Q4 2021 onward

Short interest falling on strong reporting: Monitor through 2022-2023

Non-transaction revenues get large enough to break out in reporting: Est 2023-2025