Description

Broken IPO. Small cap with low float. SMB focused. Not a subscription model. Not profitable.  Israeli company. Sounds like a recipe to avoid or go short. Yet, at just 3x 2020 revenue, growing 30-40% with 80% gross margin, Fiverr (NYSE: FVRR) is simply too cheap to ignore. The company is a fast-growing digital marketplace that connects freelancers (sellers) and businesses (buyers). As Fiverr continues to execute and build credibility, I believe the stock price will better reflect its growth and operating leverage potential. I see upside of $30/share based on 6x CY20 and 5x CY21 revenue, vs. marketplace peer Etsy at 7x and 6x.

Company background

Fiverr was founded in 2010 by current CEO Micha Kaufman and Shai Wininger as a marketplace that would provide a two-sided platform for people to buy and sell a variety of digital services typically offered by freelance contractors. Services offered on the site (called “Gigs”) include logo design, video creation and editing, website development and blog writing, with prices ranging from $5 to upwards of thousands of dollars per engagement. 

Fiverr’s approach transforms the traditional freelancer staffing model into an e-commerce-like experience. Its buyers include businesses of all sizes and from various industries. Today the majority of the buyers are SMBs. Since inception, Fiverr has facilitated over 50 million transactions on its platform between more than 5.5 million buyers and 830,000 sellers.

Fiverr priced its IPO in June 2019 at $21/share and traded as high at $44.20/share during the frenzied first day. Since then the stock has broken below the IPO price as euphoria surrounding recent Internet listings has faded.  Fiverr reported a “beat and raise” quarter out of the gate in early August.

Business model

For sellers on its platform, Fiverr charges a 20% take rate on the gross merchandise value (GMV) of the Gig. For buyers, Fiverr charges a 5% take rate, with a minimum fee of $2. For example, if a project is purchased at $100 list price, Fiverr takes $20 from the seller and $5 from the buyer. Thus, for GMV of $100, Fiverr generates revenue of ~$25 – a 25% total take rate.

Fiverr’s main value proposition to buyers and sellers is the reduction of friction and inefficiency in searching and purchasing Gigs. Fiverr makes it as easy to buy and sell a “Gig” as it is to buy and sell a physical product on eBay or Etsy. As a result of this transaction-based model, Fiverr tends to attract SMBs that are seeking lower-priced purchase points (sub-$100 Gig ASP) and faster turnaround times: logo design, website translation, video editing, etc. are popular categories.

Why the stock has sold off

• Under the radar: Fiverr is a recent IPO with a thin float (6 million shares) and $600 million market cap. It is also a foreign private issuer. As such, Fiverr does not screen well for many institutional investors.

• Foreign company bias: Though listed in the US, Fiverr is headquartered in Israel. However less than 1% of its revenue is derived from Israel. It has a diverse revenue mix: 55% from the US, 23% from Europe, 12% from Asia Pacific, and 9% from the rest of the world.

• Weak stock performance of Upwork: After giving disappointing guidance in May, shares of Upwork (UPWK) are down 25% YTD. Most investors compare Fiverr to Upwork, but they don’t understand key differences in these business models. Upwork focuses on large enterprises and has a staffing-like unit. UPWK’s gross margin is 1000 bps less than Fiverr.

• Not profitable: Like many fast-growing companies, Fiverr is not currently profitable because it is investing heavily in R&D and customer acquisition. I believe this is the right approach at this stage of the company’s maturity cycle as Fiverr attacks a large market opportunity and a fragmented competitive landscape.

Large and nascent market opportunity

According to McKinsey’s Independent Work Study in 2016, up to 150 million people in the US and EU were engaged in “independent labor services”, of which only 6% are using digital platforms. McKinsey also projected freelancers to make up the majority of workers by 2027. To be fair, many of these freelancers will not offer the type of services promoted on Fiverr (i.e., Uber drivers, freelance physicians). However, the opportunity is still large, and the shift from offline to online labor services should accelerate as technology, such as cloud-based file sharing, collaboration software and remote video conferencing, makes it easier for people to work together across different physical locations.

Fiverr’s competitive advantages

• Leading brand in a fragmented market: While the freelancing platform market is fragmented today, Fiverr is already a leading brand as compared to peers Upwork and Freelancer.com (see Figure 1). Fiverr’s growing brand position is partly a result of the company’s investment in marketing and awareness. 

Figure 1: Google Trends Over the Last 12 Months

• Service-as-a-Product marketplace: According to Fiverr, “The productization of services with a SKU-like approach provides buyers with certainty of cost, duration and scope for their projects. Buyers have access to an extensive catalog of Gigs and can compare and filter across parameters including Gig details, reviews and price. Each Gig page contains comments from previous buyers, allowing buyers to easily make decisions based on their needs, budgets and tastes. Our approach therefore allows Gigs to be bought on a much more frequent basis without the inherent friction of the traditional hourly based model. This allows us to more easily scale our business as supply of and demand for freelancers increases across the globe.”

In contrast, Upwork has more friction with its request-for-proposal (RFP) approach. Buyers post the projects, freelancers apply, and the candidates are interviewed for the job. Upwork targets enterprise customers at higher price points and with a longer time to hire.

• Network effect: Because it is a two-sided marketplace, Fiverr has powerful network effect once there are enough buyers and sellers on the platform (see Figure 2). More freelancers list their services on Fiverr because more businesses come to the platform looking for freelancers. Similarly, more businesses come to Fiverr because there are more qualified freelancers with transparent buyer ratings for every Gig. As more buyers and sellers transact on the platform, Fiverr further improves its search and matching algorithm, which in turn attracts more buyers and sellers. This flywheel effect should provide Fiverr with sustainable growth. As shown in Figure 3 and 4, Fiverr has consistently grown the number of active buyers and spend per active buyer.

Figure 2: Fiverr’s Network Effect

Figure 3: Growth in Active Buyers

Figure 4: Spend per Buyer

• Efficient marketing and buyer acquisition: Fiverr derives a majority of its buyer acquisition from organic channels, supplemented by efficient performance marketing investments. Using its cohort analysis, Fiverr has been able to achieve a positive return on performance marketing investment less than seven months after acquiring a given buyer (see Figure 5). Repeat buyers generally increase spend on the platform over time. Repeat buyers contributed 57% of revenue in 2018, up from 55% in 2017.

Figure 5: Return on Marketing Investment

Revenue growth opportunity

In addition to bringing in new buyers to its platform, Fiverr has multiple levers to drive revenue growth and take rate (revenue to GMV).

• Promoted listings: Fiverr currently does not offer promoted seller listings, but management has acknowledged that it is on their radar.  If it were to offer promoted listings, Fiverr could see revenue growth accelerate. For reference, Etsy announced on its most recent earnings call that promoted listings were the largest contributor to services revenue growth.

• New categories: Fiverr’s catalog of digital services has over 200 categories. The company continues to add categories to further improve the platform’s search and match experience for buyers and sellers.

• Fiverr Learn: Launched in 2018, this is an e-learning platform designed to help freelancers further enhance their skills and build their personal brand and digital storefront on Fiverr. Most courses are priced below $50. According to management, take rate has been very high.

• And Co: Acquired in 2018, this is an online freelance management system that allows freelancers to send proposals, invoices, get paid and manage time and tasks. The service is offered for free (limited to one active client) or $18/month (unlimited clients).

• ClearVoice: Acquired in 2019, this subscription-based service is focused on vertical-specific content marketing. It allows businesses and agencies to find and manage freelancers, control workflow and manage payment.

• Fiverr Studio: Launched in July, this is a product that enables freelancers to collaborate and provide complex multi-vertical offerings. Fiverr believes Studio will help its freelancers take on higher value projects and therefore increase total GMV.

Competition

Fiverr competes with a number of online and offline services for freelancers and buyers. The offline providers include traditional staffing service agencies, though the type of work promoted on Fiverr does not overlap with these offline providers. The online providers include other freelancer platforms (e.g., Upwork and Freelancer.com), classified ads, recruiting websites and less formal professional networks. However, none of these competitors offer access to the same range of services, global reach and ease of transaction.

Management

Fiverr’s founder and CEO, Micha Kaufman, is a serial entrepreneur and owns 8% of the company. While the executive team may lack experience in big name corporations, the board includes operating executives from several successful US-listed Israeli tech companies – the former chairman of NICE Systems ($9B market cap), the former CFO of Varonis Systems ($2B market cap), and the current COO of Wix ($6B market cap).

Valuation

Fiverr is currently investing for growth and is therefore not profitable. With 80% gross margin, however, I believe the company has significant operating leverage potential. At scale, Fiverr should have EBITDA margins that resemble those of other marketplaces such as Ebay (34%) and Etsy (26%). In the meantime, Fiverr is likely to remain unprofitable until 2021. As such, I believe using an EV/revenue multiple vs. comparably fast-growing marketplaces is reasonable. I see upside of $30/share based on 6x CY20 and 5x CY21 revenue, vs. marketplace peer Etsy at 7x and 6x. My estimates are higher than those of consensus, which I believe are too low (see Table 1).

Fiverr currently trades at a “1 turn discount” to Upwork, even though its growth rate is more than 1000 bps higher. I believe Fiverr should in fact trade at a premium to Upwork, given its faster growth and a business model that is more like Etsy (higher transaction volume, lower friction) and less like a traditional staffing firm.

Table 1: Financial Projection

Risks

• Smaller than expected market opportunity: It is possible that Fiverr may hit a ceiling on the number of active buyers and transactions.

• Competition for freelancers: Freelancers can advertise their services on multiple competing platforms, but they will stick to the ones that consistently generate businesses for them.

• Pressure on take rate: Fiverr’s 20% take from sellers and 5% take from buyers may appear high, but the take rates are modest in terms of absolute dollars, given the low GMV of an average project on the platform. In comparison, Freelancer.com charges 10% from sellers and 3% from buyers, but its total GMV is less than one third of Fiverr’s and is only growing in the low teens. I believe Fiverr can maintain the current take rate because of its superior user experience and pronounced network effect. In fact, Fiverr’s take rate has been steadily rising due to revenue contribution from ancillary products such as Learn, And Co, and ClearVoice.

• SMB churn: Fiverr’s main customer base tend to churn when they go out of business.

• Buyers and sellers take transactions offline: Once a buyer is satisfied with a purchase on Fiverr, he can ask the seller to perform future projects offline, thereby saving fees paid to Fiverr. I believe this risk is low because Fiverr ensures transparency and security for both buyers and sellers. If the projects were transacted offline, sellers would risk not getting paid for completed projects, and buyers would risk not receiving refunds for unsatisfactory projects.

Catalyst

• Beat and raise

• Launch of promoted seller listings

• Increased revenue contribution from ancillary and newer products (e.g., Learn, And Co, ClearVoice, Studio)

• Increased investor awareness

• Reduced cash burn