• Fiverr’s focus on AI and new product offerings position the company well to capitalize on the growing gig economy.
• Financials show an 8% sales increase in Q3 2024, with a notable rise in spend per buyer and an improved take rate, even as the number of active buyers declines.
• Fiverr seems reasonably valued and with a co-founder with skin in the game leading the charge, I remain bullish on Fiverr’s potential for positive returns in 2025 and beyond.

I first started to cover Fiverr (NYSE:FVRR) earlier this year. I liked Fiverr was a leader in the gig economy and the company was still led by their co-founder, Micha Kaufman. I believe companies with founders that have

Analyst’s Disclosure: I/we have a beneficial long position in the shares of FVRR either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Fiverr: Positive Momentum To Carry Into 2025 appeared first on Up2info.com.

• Fiverr Q3-2024 results got a warm reception from Wall Street, pushing the stock higher and back to positive territory on a YTD basis.
• The gross merchandise value (GMV) declined for the first time and is expected to continue and decline versus previous guidance for a 1–2% growth on a YoY basis.
• While many investors are cheering for the best-in-class take rate, simple math reveals that the wrong drivers have been fueling this growth, making it less relevant.
• A discounted cash flow analysis implies that investors are buying into the management narrative, pricing in ambitious expectations.
• Considering alternative valuation scenarios and the downward trend of the GMV, I maintain my ‘Sell’ rating for FVRR stock.

Fiverr International Ltd. (NYSE:FVRR), the online platform for freelancers, announced its Q3-2024 financial results at the end of October, beating top-line and bottom-line estimates and raising its full-year guidance. The stock reacted positively to this perfect combo, jumping 16% on higher-than-average volume in the subsequent trading session.

In this article, we will start with a quick recap of Fiverr’s latest financial results while also examining the buyback program’s effect on the share price. After that, we will dig into Fiverr’s most important KPI, at least in my opinion, which is Gross Merchandise Value (‘GMV’), and explain why its current downward trend is worrisome and why, at the same time, the Take Rate might have become irrelevant. Lastly, we will evaluate Fiverr using a discounted cash flow model and see whether Fiverr’s new approach towards value creation presents a deep-value opportunity that deserves a second look.

Q3 Recap: The Value Thesis In The Spotlight

In its quarterly letter to its shareholders, Fiverr emphasized the importance of rewarding shareholders through value creation while maintaining growth, a strategic decision the company has adhered to over the last 24 months:

We continue to generate strong cash flow and execute a disciplined capital allocation strategy that allows us to pursue growth while delivering shareholder value

(Fiverr’s letter to shareholders, Q3-2024)

Fiverr’s results come against a backdrop of challenging SMBs sentiment, yet the company generated $99.6 million in revenues during the quarter, an increase of 8% on a year-over-year (‘YoY’) basis, the first back-to-back incremental growth since Q3-2023. The company did print a lower gross margin of just 81%, its lowest since Q4-2022, but its financial income stream still made the difference in the bottom line; this quarter, financial income totaled $6.9 million, an increase of 21% YoY, and net profit was $1.3 million. Despite the full utilization of its stock buyback program and the recent acquisition of dropshipping tools provider AutoDS, Fiverr still boasts a massive portfolio totaling $379.8 million, invested both in short and long-term marketable securities (mostly corporate bonds), providing the company with a steady flow of passive income. As I noted many times in the past, Fiverr’s bottom line without this financial income boost would be negative. To be more precise, Fiverr would never have generated a net profit without this windfall. As we enter an interest rate cut cycle, it’s fair to estimate that this earnings sweetener will gradually fade, especially when ~60% of the portfolio is invested in short-term securities.

Since prioritizing profits back in 2022, setting a 25% long-term Adjusted EBITDA margin target, Fiverr has been on a steady path, improving both its margins and absolute profits. At its low point in Q2-2022, Fiverr lost almost $42 million in one quarter (asset impairment was to blame, too). Fast-forward to Q3-2024, Fiverr generated a net profit in six consecutive quarters, including a net profit of $1.3 million in the last quarter. From an Adjusted EBITDA perspective, Fiverr generated $19.6 million in Q3-2024, its highest ever, and sported an Adjusted EBITDA margin of 19.7%, a far cry from the single-digit margin a few years ago, and on the right track to achieving the 25% target.

Moreover, Q3 marked the completion of the stock buyback program. As a reminder, back in April, Fiverr announced a $100 million buyback program. During its Q1-2024 earnings call, which occurred on May 9th, Fiverr’s CFO implied that the company hadn’t started yet to buy back its stock, but in its Q2-2024 earnings call, which occurred on July 31st, the CEO stated that Fiverr had completed the buyback. This provides us with a specific timeframe to gauge the buyback effect on the stock’s price, and as you can see below, the results aren’t very encouraging; Fiverr stock slid almost 7% throughout this period.

Fiverr did retire 4.1 million shares or approximately 11% of its outstanding shares, but the immediate boost that was expected did not come to fruition.

The GMV Is Contracting For the First Time

For those of you who need a quick reminder, Fiverr operates an online marketplace for freelance services. Freelancers, known as ‘sellers’, offer their services, or ‘gigs’, to buyers. The value of each transaction on the platform is recorded as part of the Gross Merchandise Value (‘GMV’). Another way to look at the GMV is to multiply the Active Buyers by the Spend Per Buyer (‘SPB’). For example, over the trailing twelve months, there were 3.8 million Active Buyers, and the SPB was $296, resulting in a GMV of $1.12 billion. Fluctuations and trends of the GMV can teach us a lot about the health of Fiverr’s core marketplace, which is projected to contribute more than 70% of the company’s FY-2024 revenues (the rest is coming from related services, a rapidly growing revenue stream).

In my previous articles on Fiverr, I highlighted more than once my concerns over Fiverr’s stagnating GMV, growing around 1–2% on a YoY basis since early 2023. Similar growth guidance was provided by the management team at the beginning of 2024, but since then, one of the underlying drivers has deteriorated rapidly: Active Buyers. In Q3-2024, Active Buyers decreased by 9.4%, the largest decline ever recorded in this KPI. On the other hand, the SPB grew by 9.2%, which was not enough to offset the Active Buyers decline and resulted in a GMV decline of 1%. This is the first time the GMV is contracting since Fiverr went public, and it is a worrisome development for an already questionable growth story. To give you more color, during the heydays of 2020–2021, when Fiverr’s business surged on the back of COVID-19 digital transformation, the GMV grew at an astonishing annualized rate of ~60%. Although during the last 18 months, growth rates have significantly come down to around 1–2%, this new development of a contracting GMV is a red flag investors should monitor closely and may signal a further deterioration in Fiverr’s core marketplace.

We must note that Fiverr’s management has been crystal clear about its focus on higher-value buyers with larger budgets, which benefit SPB more than Active Buyers. It’s a message that CEO Kaufman and other executives have repeated many times in the past and once again in the quarterly letter to shareholders:

We remain laser-focused on building a higher quality buyer base with higher spend and better retention that translates into higher lifetime value

(Fiverr’s letter to shareholders, Q3-2024)

The rationale behind this focus stems from the pressure AI is asserting on ‘simple categories’ such as translation and voice-over services, usually associated with lower prices and shorter-term engagement. This inevitably led Fiverr to focus on what it defines as ‘complex services’ that usually command higher prices and longer-term engagement and have a stronger moat against AI disruption. So far, and especially after the GMV’s recent decline, it seems like Fiverr’s new strategy is yet to prove itself. Hearing the company’s CFO during the earnings call, the current GMV downtrend is expected to continue, making the new strategy even more questionable:

We expect GMV will still take some time to recover… we expect spend per buyer to continue growing at a robust pace, offset by the decline in active buyers.

(CFO Ofer Katz, Fiverr’s Q3-2024 earnings call)

The Take Rate Might Have Become Irrelevant

As part of its Q3-2024 earnings report, Fiverr raised its FY-2024 guidance. Investors took it at face value and cheered for the higher numbers, at least for those who were presented in the letter to shareholders:

However, a deeper analysis of the guidance, incorporating comments from the earnings call and simple math, shows that things are not as bright as might have seemed at first glance:

Click to enlarge

During the earnings call, CFO Katz mentioned that the management team expects the Take Rate to grow by approximately 330 bps on a YoY basis, higher than previously anticipated. A 330 bps growth implies a Take Rate of 35.1% by year-end versus 31.8% in 2023.

Our strategy to lean into value-added services to drive take rate expansion continues to pay off, and we continue to invest in going upmarket to unlock long-term growth opportunities…

We continue to drive strong take rate expansion as seller monetization programs benefited from the investments made in the last few months, and AutoDS delivered strong subscriber growth that exceeded our expectations.

(Fiverr’s letter to shareholders, Q3-2024)

Sounds good, right? Not so fast. As you probably remember, Fiverr Take Rate is just the outcome of dividing total revenues by the GMV. If total revenues increase, Take Rate goes up. If GMV decreases, Take Rate also goes up. Based on Fiverr guidance, a 330 bps Take Rate growth implies a Take Rate of 35.1% in 2024. Using the midpoint revenue guidance of $389.0 million, the result is a GMV of ~$1.11 billion, a decline of 2.2% in the GMV on a YoY basis.

Put simply, what Fiverr positively frames as a “Take Rate growth” is not just a result of revenue growth but also of a GMV decline. Now, one may ask – what’s so bad as long as revenues grow? Well, Fiverr’s management team gave us the answer during the earnings call:

As a reminder, Fiverr’s take rate consists of two distinctive components: first, is marketplace commission of approximately 26% and second is value-added services of an additional approximate 8% take rate. The marketplace commission is directly tied with GMV on the marketplace and has been relatively stable over the years. The expansion of value-added products has driven the vast majority of our take rate expansion.

(CFO Ofer Katz, Fiverr’s Q3-2024 earnings call)

As you can see, the main driver behind the Take Rate growth, through the revenue side of the equation, is the value-added products (which I refer to as ‘related services’). These products are primarily seller monetization programs such as Promoted Gigs, Seller Plus, and AutoDS revenues, Fiverr’s latest acquisition. Such revenues were considered ‘nice to have’ only a few years ago, but now are distorting the meaning of the company’s Take Rate, which in its essence means to present how much Fiverr charges on average from each transaction on its platform.

Because the Take Rate is essentially a weighted average, with fewer marketplace transactions contributing at the lower 25.5% rate, the high-contribution related services (assuming a 100% rate) would make up a larger portion of total revenues. The result is sort of an inflated Take Rate, obscuring the fact that the core marketplace activity is weakening.

The Value Thesis Through the Lens of the DCF Model: Are The Bulls Right?

In one of my previous articles on Fiverr, I assigned a weighted average price target of $19 for the stock. Now that Fiverr’s management team has set some concrete financial goals and timelines for the next couple of years, with a major emphasis on value creation through hard rock cash flows, I believe it’s a good opportunity to revisit Fiverr’s prospects from a value-oriented perspective. To that end, I decided to use again the discounted cash flow model to evaluate the intrinsic value of Fiverr. Because the management team has provided investors with cash flow projections back in Q2-2024, that task shouldn’t be very hard and may provide another point of view on the stock.

For those who need a little bit more context, Fiverr’s management team set a few months ago specific financial goals throughout 2027; the long-term 25% adjusted EBITDA margin target was set in 2022, but until recently, there was no timeline for achieving that target. Now, there is one: 2027, and it comes with a free cash flow CAGR of 14% and a cumulative free cash flow of more than $300 million.

The weighted average cost of capital (or ‘WACC’) I will use in every scenario will be 12%, and the perpetuity growth rate will be 2%. I also annualized Q1-Q3/2024 results and assumed the CAPEX requirements are going to stay the same every year, at ~$1.3 million. As my followers already know, as an analyst who adheres to the stochastic approach, I will provide different scenarios and assign probabilities to each one.

Scenario #1: Free Cash Flow CAGR of 14% Through 2024–2027

In this scenario, I take the management team projections at face value, expecting the company to sport a free cash flow CAGR of 14% throughout 2027. As you can see below, in this scenario, the implied upside is ~11% from the current price, meaning that investors are giving only a slight discount to the management narrative and pricing the stock accordingly.

Scenario #2: Free Cash Flow CAGR of 9% Through 2024–2027

In this scenario, I use a more moderate CAGR of just 9%, which can still be considered a healthy growth rate for free cash flows. In this case, the stock seems to trade at a fair value, meaning that although investors are discounting the company’s projections, they are still assigning a significant free cash flow growth.

Scenario #3: Free Cash Flow CAGR of 4% Through 2024–2027

In this scenario, I use a much more moderate CAGR of just 4%, a pretty stagnant free cash flow growth. In this case, there is an implied downside of ~10% from the current price level.

Scenario #4: Free Cash Deteriorates Permanently

In this scenario, I assume that free cash flow will perpetually deteriorate following a muted growth in 2024. In this case, there is an implied downside of ~25%. Although such a scenario may look implausible right now, if the core marketplace suffers from a continuing decline, the related services revenues may hit the brakes as well (as freelancers will be less inclined to buy these services), resulting in a double whammy for the entire ecosystem of Fiverr.

As can be learned from these valuation models, although the market is giving a slight discount to Fiverr’s targets, it’s still pricing in significant free cash flow growth, leaving little room for errors. Any deviation, and it’s fair to assume that the stock will be punished hard. I would assign the following probabilities for each scenario to generate the weighted average price target for the stock:

Click to enlarge

Based on these probabilities, the weighted average price target for Fiverr’s stock is $24.44, implying a downside of ~13%, further supporting my ‘Sell’ rating for the stock.

The Verdict

Fiverr’s latest results got a warm reception from Wall Street. The management’s new strategy towards value creation, with concrete timelines and the crème de la crème of value investors—strong free cash flow projections—may provide a major tailwind for the bulls after a few years of stagnation.

The bears, on the other hand, may point out the GMV contraction and the fact that the Take Rate might have become no longer relevant because its growth has been fueled lately by the ‘wrong’ drivers: (1) related services revenue growth and; (2) GMV contraction. Both don’t indicate a healthy marketplace, which is still the core business and source of revenue for Fiverr.

Evaluating Fiverr’s stock using a DCF model, the market appears to believe the management team is capable of executing very close to its plan, pricing in significant free cash flow growth. This leaves little room for error.

As of now, I go with the bears and maintain my ‘Sell’ rating for the stock. I believe the GMV decline is a major red flag to consider, putting more question marks regarding the success of the company’s focus on buyers with larger budgets, benefiting SPB more than Active Buyers. With macro still negative and AI on the back hills of ‘simple services’, the C-Suite will have to do much more to reignite the once-dubbed ‘Amazon of freelancers’

Note:

I have covered Fiverr International Ltd. or ‘Fiverr’ previously, so investors should view this as an update to my earlier articles on the company.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Fiverr International: More Red Flags appeared first on Up2info.com.

• Despite a Q3 beat-and-raise, Fiverr faces significant risks from AI competition, volatile traffic, and a shrinking active buyer base.
• Fiverr’s growth is driven by take rate expansion, not sustainable long-term drivers, and the SMB buying environment remains cautious.
• Attractive valuation multiples can’t offset the existential risks from AI and declining marketplace activity; I recommend staying on the sidelines.
• Fiverr’s Q3 revenue grew 8% y/y, but active buyers slipped 9% y/y, indicating underlying marketplace challenges despite improved adjusted EBITDA margins.
• The stock trades at attractive valuation multiples (2x FY25 revenue and 9x FY25 adjusted EBITDA), but it’s a value trap for a company that is in secular decline.

So far, through the early innings of the Q3 earnings season, investors have tended to take a favorable view of most companies’ earnings prints, especially where top-line revenue trends have bucked macro concerns and shown strength or even acceleration. And yet, we have to be extremely careful: valuations are hovering at historic highs, and not every company’s successful recent trends can be sustained.

Fiverr International Ltd. (NYSE:FVRR) is one stock where caution is certainly the order of the day. Shares of the freelance marketplace have jumped nearly 20% after reporting a beat-and-raise in Q3. And yet, I continue to find tremendous risk in this stock, especially as it sheds active buyers: a reflection of the very real fact that automation and AI compete directly against many of the use cases for a Fiverr freelancer. Year to date, Fiverr has now gained ~10%, underperforming the S&P 500: but I fear even these paltry gains may reverse.

I last wrote a bearish update on Fiverr in August, when the stock was still trading at $26 per share. Though I didn’t expect the post-earnings upside in Q3, I continue to focus on concerning metrics such as active buyer slippage. And especially amid a richer valuation for Fiverr, I am reiterating my sell rating here.

Yes: we will acknowledge that the company delivered a respectable beat-and-raise, and lifted its outlook for the current year by one point of growth:

But we have to ask ourselves: how much of this recent uptick in growth is sustainable? The company drove growth in the quarter entirely through take rate expansion, as it has been pushing various initiatives to drive higher seller monetization. Meanwhile, the company notes that the overall buying environment in the SMB space remains cautious.

Here is my full updated bear case for Fiverr:

• Risk of cannibalization from AI: While Fiverr also tries to emphasize the fact that it’s embedding AI across its platform, there can be no doubt that AI’s increasing ease of use is a threat to many core Fiverr functions. Many core Fiverr services, such as language translation, logo design, website setup, and other similar services can conceivably be done better by AI.
• The highly competitive landscape for freelance work: Fiverr is far from the only game in town when it comes to freelance marketplaces, with competition from companies like Upwork, Toptal, Freelancer, and Taskrabbit.
• Volatile traffic metrics: Fiverr itself has noted that traffic trends tend to be quite volatile, and one quarter’s success doesn’t mean that better traffic can be sustained.
• SMB exposure: Fiverr has a heavy concentration of smaller individual and SMB clients, which have been the biggest source of churn across the software industry this year. Fiverr’s own active buyer base is shrinking, a testament to tougher macroeconomic conditions for smaller firms.

Of course, given the recent upside, I do also see some “upside risks” to the bear case here:

• Shift upmarket: Fiverr has been successful at promoting programs that are driving higher spending per buyer (and drawing in higher-spending buyers). Bigger tickets overall can help to offset the gradual bleed-off in active buyers.
• Reasonable bottom-line valuation: As adjusted EBITDA creeps up in both absolute dollar terms and margin, Fiverr continues to trade at reasonable bottom-line multiples (especially amid a rich stock market), which could prompt a multiple re-rating.

This being said, overall, I see an uncompelling risk-reward profile here as Fiverr continues to trudge along with meager growth rates and loses buyers. Steer clear here and invest elsewhere.

Q3 download

Let’s now go through Fiverr’s latest quarterly results in greater detail. The Q3 earnings summary is shown below:

Revenue grew 8% y/y to $99.6 million, ahead of Wall Street’s expectations of $96.3 million (+4% y/y) by a wide four-point margin. The company drove revenue growth primarily through take rate expansion (take rate is the amount that Fiverr generates in revenue as a percentage of the dollar total of services transacted on its platform), which jumped 260bps y/y to 33.9%. The company is expecting further acceleration in revenue growth in Q4, where it has guided to 9-12% y/y top-line growth.

Still, we continue to note degradation in the company’s active buyer base, which it defines rather liberally as a person who has completed a transaction over the past year. Active buyers in Q3 slipped to 3.77k, -9% y/y (offset by a 9% y/y boost in annual spend per buyer), and a loss of 115k buyers relative to Q2.

Furthermore, though Fiverr doesn’t explicitly highlight GMV or total marketplace sales, we can back into the math using revenue and take rates. Dividing the company’s $99.6 million in revenue by its 33.9% take rate, we can deduce that in Q3, $293.9 million was transacted on the Fiverr platform: and in the year-ago quarter, with $92.5 million in revenue and 31.3% in take rate, it was $295.5 million. Therefore, Fiverr’s platform itself appears to only be holding flat or shrinking. The company is only managing to grow revenue by pushing value-added services that generate more revenue for the company, or is otherwise increasing its pricing on sellers: which I don’t view to be longer-term growth drivers that can be sustained.

On the profitability front, we do acknowledge that the company’s adjusted EBITDA grew 19% y/y to $19.7 million, with a margin of 19.7% that improved 180bps y/y.

Overall, management’s view is still that the buying environment remains cautious, though it has passed recent bouts of volatility. To me, this is an indication that we shouldn’t bank on revenue acceleration or continued margin expansion. Per CEO Micha Kaufman’s remarks on the Q3 earnings call:

On the macro level, we have seen some level of stabilization in trends since the volatility we experienced in June and July, however, the overall SMB sentiment remains weak, and the overall hiring environment continues to be challenging. We expect GMV will still take some time to recover, in the meantime, we believe our strategy to lean into products to drive wallet expansion, and our work to unlock new addressable markets continues to be the right strategy to generate growth catalysts.”

Valuation and key takeaways

At current share prices near $29, Fiverr trades at a market cap of $1.02 billion. After we net off the $663.7 million of cash and $457.2 million of convertible debt on the company’s latest balance sheet, its resulting enterprise value is $813.5 million.

Meanwhile, for the next fiscal year FY25, Wall Street analysts are expecting Fiverr to generate $2.61 in pro forma EPS (+8% y/y) on $421.0 million in revenue (+8% y/y). And if we assume a 20% adjusted EBITDA margin on that revenue profile (equivalent to the company’s Q4 guidance margin, and a slightly richer margin than what Fiverr generated in Q3), adjusted EBITDA would be $84.2 million (+14% y/y). This puts Fiverr’s valuation multiples at:

• 1.9x EV/FY25 revenue.
• 9.8x EV/FY25 adjusted EBITDA.
• 11.1x FY25 P/E.

To be sure, these are attractive valuation multiples in an expensive stock market: but it’s for a company that, in my view, faces existential risk from AI and whose expanding take rates are masking weaker marketplace activity and a declining buyer base.

In my view, it’s best to be on the sidelines for Fiverr and invest elsewhere.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Fiverr: This Company Keeps Losing Buyers appeared first on Up2info.com.

• Upwork and Fiverr have seen steep declines due to concerns over slowing revenue growth, partly driven by AI replacing some freelancing services.
• While AI has reduced demand for simple tasks like logo design, it has boosted freelancer productivity and created new service opportunities.
• Both platforms are attractively priced, but Fiverr stands out with better engagement metrics, higher gross margins, and strong app ratings.
• Both companies are trading at historically low valuations, offering potential upside, with Fiverr slightly more appealing due to its positioning.

The manic-depressive Mr. Market does not always price stocks the way an appraiser or a private buyer would value a business. Instead, when stocks are going up, he happily pays more than their objective value; and, when they are going down, he is desperate to dump them for less than their true worth. – Benjamin Graham

Most seasoned investors are well aware that the stock market can swing from extreme excitement to acute fear in a relatively short period of time. Still, it is rare to see a swing of the magnitude that gig-economy platforms Upwork (NASDAQ:UPWK) and Fiverr (NYSE:FVRR) have experienced. We have been following both companies as we appreciate the network effect moat that two-sided marketplaces tend to develop, but we warned that both companies appeared expensive despite the hyper growth they were delivering. In any case, the companies went from massively outperforming the S&P 500 Index (SPY) and the popular Invesco QQQ Trust (QQQ), to painfully underperforming market benchmarks.

One of the reasons that the market is in panic mode is that revenue growth rates have plunged. We expected growth rates to decelerate, but not as fast as they have declined. It is believed that some of the services typically offered on these platforms have been replaced by artificial intelligence (AI), such as logo designs, language translations, and simple data analysis. Still, even with the AI headwind both platforms are still growing, and expectations are extremely low at this point. When investors become extremely pessimistic, even moderately good news can cause the share price to rise substantially. This recently happened with Upwork after it announced that it was increasing its Q3 revenue guidance to $194 million, up from the original range of $179 million to $184 million. The company also shared some cost reduction initiatives, and shares jumped by more than 26%.

While AI will no doubt reduce demand for certain freelancing services, it has been increasing demand for others, and has made some Freelancers more productive. According to an Upwork presentation, Freelancers on its platform are using AI tools at five times the rate of the average corporate employee. Freelancers leveraging AI on average also generate higher earnings per hour. It is also important to remember that the majority of freelancing is still happening offline, as Fiverr reminds investors in a recent investor presentation, which means these platforms still have an enormous opportunity ahead.

Two-sided Marketplaces

We appreciate businesses with network effects competitive moats. That is, that they become more useful for customers as more people join the platform. These companies tend to have good economics, and in some cases can become natural monopolies or duopolies. A good example is Airbnb (ABNB) with short-term rentals, and Uber (UBER) and Lyft (LYFT) for ride-sharing. Two-sided marketplaces also create powerful flywheel effects that drive further growth. In the case of Upwork and Fiverr, as more Freelancers join, it becomes more likely that companies will find the service they are looking for, and as more companies join, Freelancers are more likely to get hired.

At this point, it seems both Upwork and Fiverr have attained the critical mass necessary to have healthy ecosystems, though they have specialized in different segments. Upwork tends to favor longer lasting work relationships between Freelancers and companies, while Fiverr specializes in what it calls “service-as-a-product” which tend to be better defined but shorter duration services. This is reflected in their corresponding customer numbers, with Upwork generating more revenue despite only having about 868,000 active customers, while Fiverr recently disclosed 3.9 million active buyers. Both companies benefit from repeat purchases, with Fiverr sharing cohort behavior in its investor presentation. For example, Fiverr generated roughly two thirds of its revenue in 2023 from repeat buyers.

Fiverr and Upwork share some of the same growth levers to continue expanding. These include international expansion, including to non-English-speaking countries, adding new service categories, continuing to add buyers and Freelancers to the platform, and offering ads for Freelancers to promote their services. Ads have been one of the fastest growing revenue streams for these companies, with very high incremental profit margins. This has also been reflected in the increasing take-rate that the companies have been reporting. We have mixed-feeling about monetizing visibility on their platforms, as it can improve profit margins and give new Freelancers a way to get their initial projects. At the same time, if the companies don’t balance paid promotions with giving visibility to the highest rated or best-fit Freelancers, this can deteriorate the overall customer experience.

Website & App Rankings

Fiverr has a higher-ranking website and more visits compared to Upwork according to SimilarWeb. Fiverr has approximately 46 million monthly visits, compared to Upwork’s 39 million. Fiverr’s visitors are more engaged as well, with an average visit duration of 27 minutes compared to 13 minutes for Upwork. Fiverr also boasts higher ratings in the app stores, with an average rating of 4.4 in the Play store and 4.9 for iOS, compared to Upwork’s 4.0 and 4.6 stars respectively.

Financials

Fiverr and Upwork have a good amount of fixed costs in relation to costs to maintain the platforms updated and working correctly, as well as its management and administrative structure. While it also has some variable costs that scale with growth like customer service, both companies have healthy operating leverage. As they grow, we would expect to see their operating margins improve as a result of this operating leverage, as well as the benefits of repeat customers that go directly to the website instead of clicking an ad.

Fiverr has higher gross margins, in part made possible by a take-rate that is about 10% higher compared to Upwork’s. Fiverr used to have the higher revenue growth rate during the post-Covid boom, but that has now reversed, with Upwork recently posting better growth rates. We believe both companies can reignite higher growth rates given the size of the opportunity in transitioning Freelancing online. Given that Fiverr grew significantly more during the post-Covid years, it is understandable that it is taking longer to digest those gains, especially as some companies are relying less on Freelancers now and instead opted to hire full-time employees when the economy stabilized.

Both companies are currently operating with close to break-even profitability, but they have shared their long-term models with investors. Fiverr is targeting a long-term adjusted EBITDA margin of 25%, while Upwork is more ambitious with an adjusted EBITDA margin target of 35% that it aims to reach in the next five years. Fiverr’s target is lower despite its higher gross margin given that it plans to continue investing heavily in sales and marketing (S&M), directing around 25% of its revenue there, and another 20% towards research and development (R&D). Both companies are spending similar amounts in stock-based compensation (SBC), which they take out from the adjusted EBITDA numbers, but Fiverr’s SBC is considerably higher when measured as a percentage of revenues.

Valuation

Fiverr and Upwork are both trading near their lowest historical valuations when measured using EV/Revenues. Incredibly, this valuation multiple has compressed by roughly 30x for Fiverr and close to 10x for Upwork, from their respective peaks.

With an EV/Revenues of close to 2x for both companies, not much growth is needed to justify the share prices. For comparison, Uber Technologies (UBER) is currently trading with an EV/Revenues of close to 4.3x and DoorDash (DASH) sports a 5.9x multiple.

Fiverr is trading with a forward Price/Earnings multiple of only 9.7x, while Upwork is trading with a still very reasonable 13x. Based on analyst estimates for FY2025, Fiverr is trading at a forward Price/Earnings of 8.7x, while Upwork is trading at 12.2x.

Verdict

Given that Fiverr is trading with a lower Price/Earnings multiple, its website ranks better and shows better engagement metrics, and its apps are better rated, we prefer Fiverr to Upwork. Still, we believe at current prices both companies look attractive, and they are targeting slightly different segments of the freelancing market.

Risks

There is a risk that one of the major tech companies could become interested in competing in this space, and they could become a formidable competitor in a matter of months. We think the most likely candidate would be Alphabet (GOOG), as it has previously disrupted hotel, flight, and restaurant bookings.

Still, two-sided marketplaces are resilient, especially if the new product does not have adequate product-market fit. Many thought Meta (META) would pose a serious challenge to Tinder owner Match Group (MTCH) when it entered the dating app market, but so far, its offering has not really resonated with users.

There is also the disruption posed by artificial intelligence, which in some categories like logo design and document translation is clearly having an impact. Still, it appears it is also providing some benefits, like making Freelancers more productive and creating new service categories. Anecdotally, Upwork’s statistic that Freelancers using AI tools are earning significantly more per hour shows that there is likely a benefit from AI in more complex projects like coding or business consulting.

Conclusion

We believe Upwork and Fiverr have gone from extremely overvalued to undervalued, despite a real deceleration in their revenue growth rates. Both companies continue to benefit from structural tailwinds from the migration to online Freelancing and companies getting more comfortable reinforcing their teams with external resources. The impact that artificial intelligence will have remains very difficult to quantify, but it appears that it will reduce demand for certain services, while making other Freelancers more productive and creating new service categories. At current prices, we find the valuation attractive for both companies, but find Fiverr slightly more appealing.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling shares, you should do your own research and reach your own conclusion, or consult a financial advisor. Investing includes risks, including loss of principal.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Upwork Vs. Fiverr: AI Fears Likely Overblown, Fiverr Looks More Attractive appeared first on Up2info.com.

• Fiverr’s stock has plummeted but now trades at a more reasonable valuation, presenting a buying opportunity with a potential upside of 28%.
• FVRR has matured, showing improved gross margins, increased spend per buyer, and a strategic focus on high-value clients despite a decline in active buyers.
• Long-term growth prospects are promising, driven by investments in AI, freelance Pros, and expanding market opportunities, with management targeting a 14% FCF CAGR from 2024-2027.
• Risks include market volatility, potential regulatory changes, and competition, but Fiverr’s improved cash flow and strategic buybacks indicate a more stable future.

It has been almost two years since my last article on Fiverr (NYSE:FVRR), and many things have changed. At the time I believed that the stock was highly overvalued despite the 92% collapse, and my hunch turned out to be right.

Since then, the stock has plummeted 30%, largely underperforming the S&P500. Ironically, the stock bottomed out at $20 per share, which is the fair value I had calculated for Fiverr at the end of 2022.

It is absurd to think that in 2021 Fiverr was trading at $336 per share, not even the highest expectations could justify such a valuation. In any case, that period has ended, and today Fiverr is trading at only $25 per share. Investors have scaled back their enthusiasm for this company considerably, but in my opinion they are erring once again: in the past they were too optimistic, today too pessimistic.

Why I Changed My Opinion About Fiverr

The main reason I considered Fiverr a strong sell lay in its overvaluation for its growth prospects. Gross margin was deteriorating as was free cash flow, there was no more growth in users and spend per buyer, and the platform’s fees remained high. In short, it was a disaster and the Fiverr that was growing in triple digits was long gone.

However, two years later, taking a look at Fiverr again, I was particularly surprised at its performance in recent quarters, even though the price per share is still very depressed. Fiverr has matured a lot as a company in this time frame; it will no longer grow in triple digits, but the stock is no longer trading at $336 per share, so it is not necessary for it to be a great investment.

Last quarter’s results were not that bad, in fact, gross margin reached 83.10%, spend per buyer increased by 10%, and take rate improved by 230 basis points. However, market sentiment remains negative toward this company, as revenues grew only 6% and active users decreased 8%.

Fiverr is still paying the price of having grown extremely fast thanks to the pandemic, and investors today have lost interest in this company. Year-on-year growth is no longer exciting, but if we extend the time horizon, the discussion changes.

Let me remind you that before the pandemic, total revenues amounted to $107.10 million, in the last 12 months they reached $372.20 million: if we calculate the 2019-2024 Revenue CAGR, it would be 28.29%, not bad for a company with a P/E (FWD) of 11.05x. As far as I am concerned, the mere fact that it has managed to sustain pandemic demand and not decrease revenues is already a major achievement. The market probably expects too much from Fiverr, and this is a mistake because it has already shown so much improvement in recent years. The 2019 IPO was done at $31.49 per share, today it generates a 3.50x higher gross profit, but you can buy it at $25 per share. Only poor growth prospects would justify this divergence in the two valuations, but as we will see in the next session, management is already set for a new growth cycle.

Overall, it seems that Fiverr is either loved or hated; there is no middle ground. Investors may expect linear growth of 30-40% per year, but these expectations do not represent the reality in the investment world. Even the best companies in the world have downtimes, the important thing is to recover over the long term. Fiverr has never stopped growing, it simply does so less than before because the same social-economic environment is no longer there. The pandemic is thankfully over and Fiverr has benefited a lot from it, although from its current price per share it looks like it was just the opposite.

As for the decrease in active buyers, this is a strategic move adopted by management. It certainly never pleases when they decrease but behind this trend lies a plan to focus primarily on growth in spend per buyer:

I think on the spend per buyer versus active buyer, I think we’ve made the conscious choice in the last few quarters and years to really focus on higher-value buyers. These the segment of buyers with better engagement, better retention longer term. And in the current macro where overall demand is not very strong. I think leaning into the product is really focused on that segment gives us the ability to be more efficient and really growing the spend, and you’ve seen that in the growth of spend per buyer.

Jinjin Qian, EVP, Strategic Finance, Technology Conference September 9.

Accepting a decrease in active buyers to retain the most important ones on the platform sounds like a good trade-off to me, especially in the current economic environment. Interest rates are still high, and until recently inflation was still an issue.

In essence, two years later I have reevaluated the company’s strategy, and the new data at hand have led me to totally change my rating. After all, it is true that growth at this stage is low, but the valuation multiples are too low: just think that the NTM Market Cap / Free Cash Flow is only 9.35x.

Fiverr Has Not Stopped Growing

As anticipated, Fiverr’s growth has stalled in the past two years, but that does not mean the company is not interesting. The macroeconomic environment has not helped, and the pandemic has thrown smoke in the eyes of investors regarding their long-term growth expectations.

At the current price, Fiverr does not need to grow 30-40% per year to be a great investment, growth around 10% would be enough, which, I believe, is feasible. In fact, management is also quite optimistic about it since they have released these long-term targets.

The 2024-2027 FCF CAGR is expected to grow by 14% and the EBITDA margin is expected to be around 25%, an impressive figure for a company whose main goal remains expansion. Today’s Fiverr is a more mature company than in my last article, and in addition to its future it is also thinking about its present.

Recently, shares worth $100 million were purchased, the first buyback in its history. When a company gets to this point, it means that its cash flows have become more predictable, and it has enough liquidity to be able to reduce its shares outstanding: the Fiverr that diluted shareholders and was unprofitable is an old memory. At the same time, growth prospects are nevertheless bright, and I have identified three main drivers.

The first concerns the possibility of getting bigger in a huge market. Fiverr does not even generate half a billion in revenue, yet the freelance market in the United States is worth $247 billion. There is ample room to expand, and the company’s business model I believe can benefit from the new work dynamics of the future. In the past, it was uncommon to be an online freelancer; today, it is not so unusual. The main advantage of Fiverr is that it allows companies to be more flexible in terms of their workforce. Through Fiverr, they can delegate individual projects without directly hiring new staff, and thus not be too dependent on fixed costs.

Delegating individual work to them is more convenient/cheaper than hiring an employee (and training them in some cases). By the way, Fiverr is increasingly meeting the needs of employers; in fact, the latest innovations include the integration of new labor contracts. For example, to encourage long-term labor relations, it has been included the possibility of hourly contracts. It is like a kind of fixed-term contract, but the person doing the task is self-employed and not an employee of the company.

In the past, Fiverr targeted anyone, today its focus is increasingly directed toward clients who can provide larger revenues, typically companies. To attract more and more of them, it is investing in the quality of its freelancers, the best of whom are identified as Pros. These Pro freelancers are not ordinary people who have made many sales, but professionals in their field, typically invited by Fiverr itself. In order for the Pros to try out their services, discounts of 5% on the total cost of the order were offered, and the results have been positive to date.

The labor market is set to evolve, and Fiverr seems to be one of the pioneers of this change.

The second growth driver concerns the platform’s improvement in matching active buyers with freelancers. The company has made many investments in AI, particularly to improve the “search with Neo” function. When a potential buyer browses through Fiverr’s catalog, he or she may be overwhelmed given the breadth of choice, but thanks to Neo, it will be easier to figure out whom to trust. Facilitating the user experience is critical, as buyers are more likely to make the right choice and rely on Fiverr again.

Last, but not least, driver of growth is the increase in take rate, or the ratio of revenue to GMV: compared to the previous year, it improved by 230 basis points and reached 33%.

This is important because it shows that Fiverr is able to grow even without increasing marketplace commissions, which have been firm at 26% since 2021. Value-added services are a key component for the company’s future as it allows it to diversify its revenues. In particular, these services are especially popular with sellers who want to expand their businesses and pay Fiverr to advertise their Gigs within the platform and beyond. I have worked with Fiverr in the past, and based on my personal experience I can tell you that leveraging advertising services can make all the difference. As far as I am concerned, I believe that more and more companies/people will use them to increase their orders.

In a way, there are some similarities with Amazon (AMZN), where to be at the top of the list you have to advertise your product. By the way, another curious similarity between the two companies is reflected in the huge collapse that both have experienced, albeit at different historical periods. Amazon collapsed more than 90% during the peak of the tech bubble in early 2000, the same for Fiverr but 24 years later. The two companies are totally different, but this example is to point out that even if a company collapses more than 90% does not mean it is dead. I think many people thought that for Fiverr, just as many others thought that for Amazon.

Valuation And Risks

What most convinced me to invest in Fiverr was its valuation, which was excessively depressed even discounting reasonable expectations: the stock fell too far and this created a buying opportunity.

To calculate Fiverr’s fair value, I used a discounted cash flow model, whose RRR is 15%. I intentionally entered a huge discount rate given the riskiness of the investment, but as you will see the stock will still be undervalued; I also entered a perpetual growth rate of 2.50%.

As for the expected cash flows, I have made several assumptions.

The figures entered from 2024 to 2027 were calculated using a 20% free cash flow margin from Street Estimates of revenues. From the last estimate of 2027 onward, I considered a growth rate of 10% per year until 2033.

The result is a fair value of $32.05 per share, a potential upside of 28% from the current price, in addition to an RRR of 15% per year. In short, should Fiverr succeed in achieving these results, I could be confident that I have made a smart investment.

By the way, I don’t think my estimates were that unreasonable. The 2023 free cash flow margin was even higher, 22.70%, and a 10% growth rate seems conservative to me given the company’s potential. In all this, the model does not consider new buybacks that could give an additional boost to fair value.

As far as I am concerned, there are the premises for Fiverr to be a successful investment, but it is important to point out the risks as well.

First of all, Fiverr represents a very small percentage of my portfolio, being a highly speculative company. Compared to a few years ago, it has matured a lot and its cash flows are more predictable, but it is still very small and subject to high volatility. The fact that Fiverr has collapsed by 90% does not mean that the bottom has been reached. Certainly, as long as free cash flow stays positive and net debt negative it cannot go bankrupt, but it can still collapse as low as $10-$15 per share. There is no brake on market crashes, and even if a stock is undervalued, it may continue to be so for years. Are you willing to be that patient?

Another risk may be due to new regulations regarding freelancing platforms, as well as over-saturation of the industry. The labor market is constantly evolving, and we do not know what role Fiverr will play in the long term, as well as major competitors such as Upwork (UPWK). The addressable market is still large enough for everyone, but competition may increase in the future, reducing profit margins. After all, we are still in the early stages: 15 years ago, Fiverr did not even exist.

The last risk is that my estimates of future growth are wrong, so the fair value is lower; I think I have been conservative, but I don’t have a crystal ball. The growth rate may no longer reach double digits, and Fiverr may have been just a passing fad and not a pioneer.

Conclusion

Fiverr is a company that has probably gone through the most difficult period in its short history: from being loved by everyone to being disregarded. The collapse of the price per share is comparable to that of a company on the verge of bankruptcy, which I, personally, find absurd.

The growth rate shrank a lot, but because the whole sector had been inflated by the pandemic. Compared to a few years ago, everything has changed, including the macroeconomic environment: after years of very strong growth, I can justify a few subdued years.

I expect that investments in freelance Pros and AI can increase spend per buyer in the long term, just as I expect more and more companies to rely on platforms like Fiverr rather than increase their staff.

In April 2024, the stock was trading at $18.83 per share, a 94.40% collapse from its all-time high; from that low, the stock began a rapid ascent that brought it to its current price.

Just like a phoenix in ancient Egyptian legend, Fiverr is poised to rise from its ashes.

Editor’s Note: This article was submitted as part of Seeking Alpha’s Best Value Idea investment competition, which runs through October 14. With cash prizes, this competition — open to all analysts — is one you don’t want to miss. If you are interested in becoming an analyst and taking part in the competition, click here to find out more and submit your article today!

Analyst’s Disclosure: I/we have a beneficial long position in the shares of FVRR either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Fiverr: A Phoenix Rising From Its Own Ashes (Rating Upgrade) appeared first on Up2info.com.

• The long-term gig work thesis remains strong, with Fiverr well-positioned to capitalize on the shift towards flexible work arrangements.
• Fiverr’s new professions catalog and AI tool Neo enhance its competitive edge, while the AutoDS acquisition strengthens its dropshipping capabilities.
• Financial performance shows growth in sales and gross margins, but declining active buyers and challenging macro conditions pose risks.

I first reviewed Fiverr (NYSE:FVRR) back in January. I liked that the company was founder-led and thought the organization seemed well positioned to take advantage of the growing trend of remote and freelance work.

Since that article, the stock is down nearly 10% and year-to-date, the company is still underperforming compared to the S&P 500 as Fiverr is slightly down.

Despite the mediocre returns of 2024, I still am bullish on the company as I feel they are set up for success in the years to come.

Let’s dig into recent events and the company’s recent financial performance.

Gig Economy is Here to Stay

One reason I remain bullish on Fiverr’s long-term prospects is because work is changing. I believe the COVID-19 pandemic uprooted the standard 9-5 job and brought to light the possibilities of remote work.

In the years following the pandemic, numerous companies had mandated employees go back to the office. However, I think more companies have created hybrid working models and many have gone fully remote. I believe if a company is looking for the best talent, you’ll work out an arrangement beneficial for both parties. One recent example is Starbucks poaching Brian Niccol from Chipotle, and they have stated Niccol doesn’t need to relocate or exclusively work in the company’s Seattle headquarters. Now, I know this might be an exaggerated example as these are CEOs leading from afar, but I believe in the years to come this eventually will be more of the norm as companies who want top talent will need to offer flexible arrangements.

This is the type of freedom employees will be looking for in the years to come, and there’s where the gig economy comes into play. Recently, LinkedIn co-founder Reid Hoffman stated he believes the 9-5 workday will become a thing of the past.

Hoffman went on to say, “You may not do a lot of your work fully as an employee, you may actually be working in the gig economy where you may have two or three gigs. These are the directional changes from what we’ve seen in the workforce for the last few decades.”

I don’t think the 9-5 we see today will disappear, but I do think remote work has led to individuals wanting more freedom and if their current employer doesn’t allow such flexible arrangements, the gig economy will.

Acclaimed investor and entrepreneur Naval Ravikant shared statements similar to Hoffman as he believes more individuals are looking at the benefits the gig economy allows, such as flexibility and more creativity. Ravikant stated, he thinks, “In 50 years, everyone will be working for themselves.”

Again, I doubt “everyone” will be working for themselves, but I certainly think it’s trending that way as more individuals want what gig work can provide and as a leader in this particular space Fiverr is in an excellent position to assist both buyers and sellers in the gig economy.

Lastly, Product Release and New Acquisition

One of the key additions to Fiverr’s business associated with their Summer Product Release was the addition of the professions catalog. As I noted in my prior article, it seemed like Upwork (UPWK) was doing a better job of hiring professionals and enabling businesses to hire freelancers for longer periods. I think this addition will help round-out Fiverr’s offerings and compete more directly with Upwork. The company’s CEO, Micha Kaufman had this to say about the professions catalog, “With the introduction of a professions-based catalog and the ability to initiate time-based transactions and contracts, we are enabling businesses to hire long-term freelancers who act as part of a team with ongoing tasks and goals. This is not an area we competed in historically, but as we increasingly go upmarket and lean into complex service categories, it becomes essential to round up our offerings. We believe it will significantly expand our direct addressable market, allowing us to open up top-of-funnel, specifically for traffic with long-term hiring intentions.”

The other big component of Fiverr’s summer product release was the further integration of the company’s AI tool, Neo. The company is hoping customers can more easily navigate through Fiverr’s massive catalog with the help of Neo and provide more relevant recommendations.

Fiverr also recently acquired AutoDS in July. AutoDS is a dropshipping software provider. Fiverr has had dropshipping as a category for numerous years and has seen recent growth in this category, which is why the company decided to acquire AutoDS. On the Q2 earnings call, Kaufman had this to say about the acquisition, “AutoDS is practically in the software space related to dropshipping, is the number one player in the world. It’s a fast-growing company, we love the team, it’s extremely synergic with our business for a number of reasons. It allows us to double down on dropshipping, e-commerce, social media, user-generated content, and video categories, which is, as I’ve said, some of the fastest growing categories on Fiverr. It’s a community that we know very well and feel very strongly about.”

Risks

As the graphic below illustrates, Fiverr’s active buyers have continued to decline. However, annual spend per buyer continues to grow:

As management has noted, the company’s focus currently isn’t to get more buyers, but to continue to increase buyer spend. If the number of active buyers continues to drop without the offset of additional buyer spend, this would certainly impact the business.

Also, management did note current macro conditions with are impacting small and midsize business (SMB) On the earnings call, Kaufman stated,

“First, macro environment continues to be challenging in terms of SMB and the sentiment of hiring. And I think that there’s a few stats that are worth calling out here. So we have the small business index that continues to linger at the lowest levels in a decade. You have the job opening that are down 7% year-over-year and in the tech sector, specifically they’re down 17% year-over-year and you have professional staffing that is tracked through staffing hours that is also down 7% year-over-year, which is slightly worse than it was a year ago.”

While there seems to be less probably of a hard landing occurring in the United States, worsening economic conditions would surely continue to hurt SMB.

Financials

In Q2 2024, Fiverr delivered sales of roughly $94 million, which is an increase of 6% compared to the prior year quarter. GAAP gross margins were 83.1% for the quarter, which is slightly better than 82.5% in Q2 2023. Also, as you can see, the company posted a profit for this quarter and YTD compared to net losses in the prior year:

However, as operating expense have increased as well, I believe financial income is ultimately why the company is posting net income in 2024.

From a cash flow perspective, the company had free cash flow of $20.7 million for the second quarter of 2024, which is an increase of 12% compared to Q2 2023. Fiverr used their cash to repurchase $100 million of stock in April in accordance with the company’s buyback program.

For the quarter, active users did decline by 8% as the company had 3.9 million as of June 30, 2024, compared to 4.2 million users in the prior year second quarter. However, buyer spend did increase by 10% compared to the prior year. Relating to buyers, the company is seeing strength in cohort behavior. The below graphic illustrates the efficiency of the company’s strategy as the LTV to CAC ratio continues to improve:

In Q2 2024, Fiverr’s overall take rate was 33% and as you can see in the below graphic, the company has increased their take rate over the last several years, largely due to the monetization of value-added services:

This is certainly another positive as the company looks to continue to increase buyer spend.

Valuation

Fiverr has a valuation grade of a “D” at Seeking Alpha:

I believe price to sales is likely the best metric for this organization. Despite forward-looking price/sales of 2.31 beating the sector median, the company’s ratio has come down compared to where it started the year:

Although Fiverr’s forward P/S is higher than Upwork’s ratio of 1.708, I believe that’s justifiable as analysts are projecting growth of 10% or greater in the coming years:

This projected growth is higher than Upwork’s projected growth and given Fiverr’s move to sell more upmarket I think Fiverr’s outlook is brighter and is the stock I’d prefer to own of the two. Given these various factors, I think Fiverr’s current valuation is reasonable.

Conclusion

I do believe the long-term thesis for gig work remains strong, as more workers are looking for flexibility and freedom that a standard 9-5 job no longer allows.

I think the launch of a profession-based catalog will allow Fiverr to move upmarket and complete for more opportunities within the gig economy.

I will keep an eye on active buyers because if buyer count continues to drop, Fiverr must continue to get their number of frequent active buyers to spend more.

Fiverr’s current valuation remains reasonable, and I think investors can feel comfortable adding shares.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Fiverr: Long-Term Thesis Remains Intact appeared first on Up2info.com.

• Fiverr reported Q2 FY24 earnings where revenue and adjusted EBITDA grew 6% and 16.8% YoY, respectively, as spend per buyer and take rate expanded from strong cohort behavior on the platform.
• Although active buyers declined along with weakness in complex services from macro volatility, the management is focused on driving robust product innovation with strong financial discipline.
• The company is expanding into the long-term freelance hiring space while simultaneously growing its footprint in dropshipping categories with the AutoDS acquisition.
• As the company unlocks new revenue opportunities along with expanding margins, I believe the stock is attractively priced to drive significant upside over the long term, making it a “Buy”.

Introduction & Investment Thesis

I last wrote on Fiverr (NYSE:FVRR) in May, where I downgraded the stock from a “buy” to a “hold” after it rallied close to 19% post-Q1 earnings, thus leaving little to no upside for the stock based on the management’s forward guidance at the time. Since then, the stock has declined 7%, underperforming the S&P 500.

Fiverr is a digital services marketplace that connects businesses (buyers) with freelancers (sellers) in over 700 categories. It reported its Q2 FY24 earnings in late July, where revenue and Adjusted EBITDA grew 6% and 16.8% YoY, respectively, beating estimates. Although the company saw a decline in its Active Buyers once again along with weakness in its “complex services” category from macro volatility, it still managed to expand its spend per buyer, which grew 10% YoY to $290, while its take rate rose 230 basis points YoY to 33%.

During the earnings call, the management emphasized its focus on progressing upmarket while gaining market share in complex services through robust product innovation in their Summer Product Release. Simultaneously, the company is also expanding its product portfolio in the long-term freelance hiring space while growing its footprint in the fast-growing dropshipping-related categories with the acquisition of AutoDS, thus unlocking new revenue opportunities.

Although macroeconomic uncertainties persist, I believe that the management’s target of reaching an Adjusted EBITDA margin of 25% by FY27 is a positive sign. Assessing both the “good” and the “bad,” I believe that the stock is attractively priced from a risk-reward standpoint. Therefore, I will upgrade it back to a “buy” rating with a price target of $37.

The good: Spend per buyer and Take Rate expands, Robust Product Innovation, Expanding footprint in Dropshipping-related categories, Growing profitability

Fiverr reported its Q2 FY24 earnings, where it saw its revenue grow 6% YoY to $94.7M, beating estimates, as the company continued to expand customer wallet share while simultaneously expanding their take rate through effective monetization of their Seller programs that include Promoted Gigs and Seller Plus. During the quarter, the company expanded their spend per buyer by 10% YoY to $290, which indicates that the company’s strategy for attracting and engaging high-value customers is yielding results while driving robust product innovation.

In my previous coverage on Fiverr, I discussed that the company has two strategic priorities that include progressing upmarket to attract more businesses with higher lifetime value and increasing their market share in complex service categories where projects tend to have a longer duration with higher transaction sizes. While the management discussed that they saw some weakness in complex services during the quarter from macro volatility, they continued to drive robust product innovation with their Summer Product Release, where it introduced its professions-based catalog, allowing businesses to find profiles that exactly fit their job descriptions, especially as they look to capture the portion of the addressable market that lies in a long-term engagement with a freelancer. As the company increasingly moves upmarket and drives penetration into complex services, expanding into the long-term freelance market will open up growth opportunities by unlocking more freelance hiring budgets. In my opinion, this is a win-win for all parties involved, as businesses will get access to the best human talent around the world, while freelancers will get opportunities that empower their career and success.

Simultaneously, the company is also creating additional growth catalysts with their latest acquisition of AutoDS, which is a leading platform that provides an end-to-end solution for dropshippers. This acquisition will enable Fiverr to diversify its revenue model to include a new subscription-based revenue stream where AutoDS brings tens of thousands of dropshippers into the Fiverr ecosystem, thus expanding Fiverr’s footprint in categories where it is currently seeing strong momentum, such as dropshipping, website development, e-commerce management, and more. I believe this acquisition is in alignment with Fiverr’s ethos of empowering the creator community to be successful, while demand in dropshipping-related categories should continue to grow from rising trends in fast-fashion e-commerce sites and social media.

Shifting gears to profitability, Fiverr generated $17.8M in Adjusted EBITDA, which grew 16.8% YoY, with a margin improvement of 180 basis points to 18.9%. The company continued to showcase its commitment towards its 2027 Adjusted EBITDA margin target of 25% as it streamlined its operating expenses, which grew at 3.5% (on a non-GAAP basis), a much slower rate than overall revenue growth, allowing the company to unlock operating leverage. Simultaneously, the company is also benefiting from strong cohort behavior, with 67% of core marketplace revenue coming from repeat buyers, while its payback periods continue to become more efficient, with the LTV to CAC ratio reaching over 2.1x, much higher than previous years, as businesses deepen their adoption of the Fiverr platform.

The bad: Active Buyers continue to decline, Weakness in complex services from macro volatility

However, its Active Buyers continued to decline both year-over-year and on a sequential basis to 3.9M. Although the company is focusing on driving wallet share among high-quality buyer cohorts with a larger lifetime value, it is slightly concerning to me that the decline in Active Buyers has not yet troughed.

Plus, the company also saw some pullback in traffic in June as macro volatility persisted in the SMB segment with poor NFIB sentiment and declining job openings, particularly in the Information Sector. In my previous posts, I have discussed the company’s strategic priority to increase market share in complex services that have generally benefited from the large capex spend in GenAI, where they have been seeing a double-digit growth rate with longer-duration projects along with higher transaction values. However, the management outlined that they saw weakness in higher-ticket projects during the quarter from macro volatility and thus did not provide the figures for revenue contribution from complex services and the rate of growth in its high-value buyers cohort that spend at least $500 annually (like it did until the prior quarter). However, the management continues to remain positive about the long-term prospects of AI and expects it to be a tailwind for businesses demanding access to AI talent and services, which should benefit Fiverr in gaining greater market share in the complex services category.

Revisiting my valuation: Fiverr is back to “buy”.

Looking forward, the management has raised its FY24 revenue guidance from $384M to $385M, which represents a growth rate of 6.5% on a year-over-year basis. As the company continues to move upmarket and push into complex services that benefit from genAI through robust product innovation, it should be able to gain a higher market share as macro volatility subsides from interest rate cuts in the coming quarters. Simultaneously, I am optimistic about the company’s expansion into the long-term freelancer hiring space, while the addition of subscription-based revenue from its latest AutoDS subscription will help it diversify its revenue model. As it continues to gain a higher customer wallet share while expanding its value-added product portfolio, it should grow in the high single-digit to low teens over the next 3 years to generate approximately $508M in revenue by FY27.

From a profitability standpoint, the management raised guidance to an Adjusted EBITDA of $71M, which represents a margin of 18.4%. Given the management’s commitment to reach an Adjusted EBITDA margin of 25% by FY27 as it unlocks higher operating leverage from greater spend per buyer across customer cohorts and efficient payback periods, it should generate close to $126M in Adjusted EBITDA, which will translate to a present value of $95M when discounted at 10%.

Taking the S&P 500 as a proxy, where its companies grow their earnings on average by 8% over a 10-year period, with a price-to-earnings ratio of 15-18, I believe that Fiverr should trade at least on par with the index. This will translate to a PE ratio of at least 15, or a price target of $37, representing an upside of 55% from its current levels.

My final verdict and conclusions

Although the company saw a decline in Active Buyers along with macro volatility leading to weakness in complex services, where it did not provide revenue contribution from complex services as well as growth rate in high-spend buyers, I believe that the weakness will likely be temporary. In the latest reading, the NFIB Optimism Index rose to 93.7, the highest level since February 2022. Meanwhile, the Fed’s interest rate easing cycle should spur growth in the economy, leading to further improvement in business confidence and spending cycles. Moreover, I believe that demand for AI talent and services is likely to remain strong, especially as we move from the infrastructure-building phase towards deploying AI applications. To this, I will also add that I am optimistic about Fiverr’s initiative to expand its TAM into the long-term freelance hiring space, especially as they move upmarket and into complex services, enabling it to capture a higher share of the total freelance hiring budget. Simultaneously, its revenue expansion opportunity with the acquisition of AutoDS will also help it diversify its revenue model.

Although macroeconomic uncertainties persist, I believe that the management’s commitment to reach 25% Adjusted EBITDA by FY27 demonstrates their financial discipline when it comes to driving efficient marketing programs to streamline payback periods while driving higher spend per buyer across customer cohorts. Assessing both the “good” and the “bad,” I believe that the stock is attractively priced at current levels, with sufficient upside for long-term investors. Therefore, I will upgrade my rating from “hold” to “buy” with a price target of $37.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in FVRR over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Fiverr: Expanding Revenue Opportunities And Margin Growth Should Push The Stock Higher appeared first on Up2info.com.

• Fiverr stock surged 20% after Q2 results, despite only slightly raising its full-year outlook.
• The company does offer a cheap valuation, but that’s a reflection of slowing growth and nascent risks from the increased AI-driven automation of tasks often assigned to freelancers.
• The company’s active buyer base continues to decline, and given Fiverr’s exposure to the SMB segment, this trend is set to continue.

For the most part, many companies have disappointed so far in the Q2 earnings season, but a lot of small and mid-cap companies have managed to buck the recent volatility. Fiverr (NYSE:FVRR) is one of these fortunate names: the freelance marketplace surged nearly 20% after reporting Q2 results, despite barely beating current quarter expectations and similarly barely raising its outlook for the full year.

Fiverr has struggled in the post-pandemic era to defend its niche. While rival Upwork (UPWK) has continued to find success by primarily targeting enterprise buyers, Fiverr still remains more of an individual user and SMB story: and in a climate where everybody is watching spending levels, the company’s buyer base has continued to shrink. The post-earnings rally has taken Fiverr’s stock to roughly flat YTD (underperforming the S&P 500 by quite a bit), but I think this will be a short-lived relief rally that will give way to further losses.

Despite a slight guidance boost and still-cheap valuation, Fiverr doesn’t have enough fundamental excitement to drive a sustained rally

I last wrote a bearish article on Fiverr in June, when the stock was trading lower at ~$24 per share. I’m unconvinced that Fiverr is on a materially stronger trajectory following Q2 earnings, and in my view the sharp rally that the stock has enjoyed since then makes the likelihood of a reversal even more daunting. As such, I’m reiterating my sell rating on Fiverr.

The only appeal I see to Fiverr, and the main “upside risk” I see to the bear case here, is the stock’s rather cheap valuation. At current share prices near $26, Fiverr trades at a market cap of $1.01 billion. After we net off the $704.0 million of cash and $456.6 million of convertible debt off Fiverr’s most recent balance sheet, the company’s resulting enterprise value is $763 million.

Meanwhile, the company has raised its latest full-year FY24 outlook by a smidge to $383-$387 million in revenue (or 1 point of growth higher on the low end of the range, with the high end maintained) and $69-$73 million in adjusted EBITDA, or an 18% margin at the midpoint.

This puts Fiverr’s valuation multiple at:

• 2.0x EV/FY24 revenue
• 10.7x EV/FY24 adjusted EBITDA

But in my view, despite a cheap valuation, Fiverr lacks the fundamental catalysts to spark an upward multiples re-rating. In fact, the company is shouldering quite a number of red flags and risks:

• AI risks. While Fiverr also tries to emphasize the fact that it’s embedding AI across its platform, there can be no doubt that AI’s increasing ease of use is a threat to many core Fiverr functions. For example – there is much less need to pay a logo designer on Fiverr now when free AI tools can craft a professional-looking logo in seconds.
• Highly competitive landscape for freelance work. Fiverr is far from the only game in town when it comes to freelance marketplaces, with competition from companies like Upwork, Toptal, Freelancer, and TaskRabbit.
• Volatile traffic metrics. Fiverr itself has noted that traffic trends tend to be quite volatile, and one quarter’s success doesn’t mean that better traffic can be sustained.
• SMB exposure. Fiverr has a heavy concentration of smaller individual and SMB clients, which have been the biggest source of churn across the software industry this year. Fiverr’s own active buyer base is shrinking, a testament to tougher macroeconomic conditions for smaller firms.

Steer clear here and resist the temptation to ride this rally.

Q2 download

Let’s now go through Fiverr’s latest quarterly results in greater detail. The Q2 earnings summary is shown below:

Revenue grew just 6% y/y to $78.6 million, in-line with Wall Street’s expectations and also in-line with Q1’s 6% y/y growth rate.

The fact that Fiverr isn’t seeing revenue growth rates slip is comforting. What’s worrying, however, is the continual slippage that we’re seeing in the active buyer base. As of the end of Q2, Fiverr’s active buyers declined to 3.89 million, which represents a -8% y/y reduction versus the prior-year Q2.

And against Q1 (where Fiverr ended with 4.00 million buyers), the company lost ~112k active buyers and the y/y decline accelerated (versus a -6% decline in Q1).

It’s a worrying picture of a company that has quite a bit of reliance on smaller customers. The company itself acknowledged that while trends were stronger in the first half of FY24, traffic trends have moderated somewhat in June – which calls into question whether Q3 and the remainder of FY24 truly deserve a guidance lift.

During the Q2 earnings call, CFO Ofer Katz noted as follows:

Both were impacted by a slowdown in traffic started in June as the strength we saw in the earlier part of the year proved to be more of a pull-forward rather than a sustainable turn of trends. These trends serve as a reminder for us that we are still in the middle of a macrocycle, where higher inflation and interest rates impact the immediate cash flow of small businesses, erode their confidence in spending, as they try to preserve more cash and delay large projects for potentially rainy days ahead.

As we enter into the second half of this year, we are expanding our product portfolio both organically and inorganically to create additional growth catalysts, as Micha covered extensively in his remarks. Our seller monetization programs such as Promoted Gigs and Seller Plus continued to show strong growth momentum and the addition of AutoDS will further strengthen our overall take rate. We believe these efforts will keep us on track to deliver the targets we set at the beginning of the year.”

The one positive note we can mention is the company’s continued boost in adjusted EBITDA margins, which have jumped to 18.9% in Q2: up 180bps y/y.

Still, amid slower top-line expansion, we worry that the company’s pace of EBITDA growth may also slow down.

Key takeaways

With slowing growth, a weakening active buyer base in a tough macro environment, and sharp competition from both automation of freelancer tasks as well as other freelancer marketplaces, Fiverr’s future is incredibly uncertain: which is the core justification we can offer against the stock’s seemingly cheap valuation. Continue to steer clear here and invest elsewhere.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Fiverr: The Post-Earnings Rally Will Be Short-Lived appeared first on Up2info.com.

• Fiverr’s performance has been worse than expected, with disappointing revenue and GMV growth.
• However, despite short-term challenges, Fiverr’s long-term narrative remains intact with potential for strong growth in the online freelancing industry.
• Actual AI impact has been a proof of its business model being technology-agnostic.

Almost two years have passed since my last evaluation of Fiverr International Inc. (NYSE:FVRR). In that initial analysis done in Aug 2022, I considered Fiverr a great idea for long-term investors who wanted to participate in the digitalization of the freelancing industry, an industry with a secular trend and attractive long-term growth perspectives. Since then, however, the shares have depreciated by c. 25% (c. 40% since the article was published) even though I found them undervalued with an intrinsic value of c. $60 per share. In between, there were tech layoffs, a more severe-than-anticipated post-COVID impact, higher-than-expected rates, and the rise of AI.

However, there are signs that expectations may have bottomed out. Now, the economy seems stronger than anticipated, the number of layoff rounds has decreased, and Fiverr is focusing on boosting spend-per-buyer by going through complex services and an up-market focus. Based on that, this article will share my updated vision of the company, looking at the industry, Fiverr’s latest results, and its outlook.

A disclaimer before starting: while I acknowledge the uncertainty surrounding the process, I’m a firm believer in the freelancing digitalization story. Therefore, this analysis represents an opportunity for me to revisit my story from a critical perspective. By examining it as objectively as possible, I will try to look for inconsistencies and potential signals that might lead me to reconsider my position.

Fiverr’s last two years’ performance

Being direct and concise, Fiverr has performed significantly worse than expected over the last two years. Back in Aug22, I assumed that after the post-COVID normalization, the digital freelancing industry would re-accelerate its growth at rates, although lower than those reported during COVID-19 (c.50% CAGR from FY19A to FY21A), still quite attractive. However, adopting online freelancing is more difficult than I first thought.

Actual results vs expectations

In fact, I assumed that Fiverr could make its business grow at a 22.3% CAGR during the next two years. However, the reported revenue CAGR for FY21-23A was just 10.2%, significantly lower than my estimates. Regarding the evolution of both Fiverr’s GMV and its take-rate, GMV grew significantly less than expected, but this was partially offset by a better-than-expected increase in take-rate.

1. GMV (+5.4% vs. 21.8% CAGR estimated): no growth in active buyers and lower than expected spend per buyer. In fact, if we consider the inflation impact, the total real value of transactions (GMV) ordered through the platform declined during the period FY21A-FY23A.
2. Take-rate (30.9% vs. 29.2% as of FY23A): In this case, Fiverr successfully managed to improve its take-rate thanks to the increase in advertising and other value-added services offered to freelancers, which more than offset the growth in large clients segment (with presumably lower take-rates).

In terms of margins, these were surprisingly better than expected. Considering the current context marked by decelerating revenue growth and a difficult macroeconomic situation, with tight financial conditions especially affecting SMEs, Fiverr demonstrated its capacity to improve its operating margins to investors. The company implemented cost-cutting initiatives, reduced marketing expenses, and generated positive cash flows, albeit with the help of SBC.

Reasons behind this underperformance?

• Digital freelancing adoption: transitioning businesses’ workforce from traditional staff to digital freelancers is a significant change that requires adaptation processes and, more importantly, overcoming profound cultural/psychological barriers, which are the main reasons why this change is not going as fast as I could think. The industry is still in its first stages, and online freelancing, as offered by this type of company, is still being evaluated and used on a project-by-project basis to solve specific needs. If success is proven, as it seems, it might be happening as demonstrated by cohorts’ behavior, freelancers should become an option for additional projects and end up being a core product or tool used by companies to get work done. However, it is a long way.
• Going up-market: Fiverr’s customer base used to be skewed towards one-time, basic services, with individuals representing a significant part of the company’s volumes. This worked well during COVID times with people at home and when new businesses rapidly saw online freelancing as a temporary solution to restrictions and labor force scarcity. Nonetheless, now that COVID has passed, those one-time services have significantly decreased, and the industry value resides on the corporate side. Fiverr is conscious of that and one of its key objectives is to move up-market.
• Macroeconomic conditions: while general macroeconomic indicators seem to suggest that we are in a very good situation, with a no-landing narrative spread all over the market (unemployment rates near historic lows, salary growth at rates over 4% y/y and companies margins and GDP growth rates at recent highs) there are some exceptions, and a closer look to details reveals potential challenges for platforms like Fiverr. Specifically, the tech/startup world, a key source of clients for these platforms, is experiencing difficulties with recent news about restructuring, cost-cutting, and funding difficulties raising concerns. Consequently, it is understandable that these factors translate into lower personnel expenses and delayed project launches, impacting Fiverr’s growth rates.
• AI: Fiverr’s management has been persistent about assuring that AI is not a problem. However, numbers don’t show that. According to the Company, AI generated a net 4% positive effect on GMV, but this does not account for inflation. When inflation is considered, the impact of AI becomes less clear. Even if we believe that the demand for new AI services might act as a push for its GMV, it has been largely offset by a decrease in demand for basic services. This decline is particularly concerning given Fiverr’s customer base, which used to be skewed towards one-time, basic services. Therefore, so far, I consider that AI has had a net negative effect on Fiverr, at least in value terms, as it has hurt the company’s growth rate capacity in the short term, becoming a significant factor explaining the business’s temporary deceleration.

In short, these are quite disappointing results that are not explained by a single factor but by a mix of them. While current stock prices are far from the highs of the COVID-19 peak, it is somewhat understandable as the growth component in the valuation of Fiverr is still very significant, and two years have already passed without it.

Having said that, the key question is: does this change my view of its long-term story?

Fiverr’s long-term narrative

As I explained at the beginning of the article, my narrative of Fiverr revolved around an industry with a secular trend and attractive long-term growth perspectives. Thus, it is essential for me to assess whether this has changed or not over the last two years.

Digital freelancing industry potential

The growth of the industry can be attributed to two key drivers: (i) the digitalization of freelancers, as only digital jobs can be performed throughout these platforms, and (ii) the share of online freelancers compared to traditional workers in the overall workforce.

Regarding the first point, I find no reason to change my belief that the freelancing industry will continue its digitalization process. As is the case of many other industries, the impact of technology is unavoidable. Digital-related jobs will keep advancing over physical ones, and freelancers will need to adapt.

However, with regard to the increase in the share of online freelancers, I believe that we should be cautious when talking about the “seismic shift” in the workforce that some of the industry leaders have claimed. As the deceleration post-COVID has demonstrated, this change has resulted to being less structural than expected or at least it is going to take much more time to occur. Although, I believe that this “shift” makes sense for both businesses and workers, it still has a lot of barriers to face.

In conclusion, here are two findings from the past two years: (i) it seems that the industry’s potential remains substantial, but (ii) the speed at which it can be exploited may be lower than anticipated.

Artificial Intelligence

I previously argued that the net impact of AI on Fiverr has been negative in the short term. However, it is also true that this impact has been limited and that, for the medium/long-term, it represents very good news to the extent that it is clear evidence of its business model being technology-agnostic. The core idea is to understand that the platform is not dependent on any technology but on the growth of online/digital freelancers. There might be temporary turbulences from technology disruptions like AI, but as soon as supply adapts again to market demands, growth will follow.

This fact, which, I think, has not been well tackled by Fiverr’s management, is key to arguing that the long-term story is still strong and valid.

Revisiting numbers

After tackling the industry’s long-term trend, it is time to revisit Fiverr’s intrinsic valuation. To do that, I will focus on the following:

• TAM
• Fiverr’s growth rates
• Long-term sustainable operating margins
• Balance sheet

TAM

Consistent with my overall view, I limited Fiverr’s TAM to the size of the current freelancing market, measured as the total dollar earned in revenue in 2023 by independent professionals. According to the Company, this figure amounted to $191 billion in the US.

Using a back-of-the-envelope calculation and assuming the US represents roughly c.80% of the world’s freelancing market, I get to a total TAM of $239 billion. Considering Fiverr’s reported GMV of $1.1b in FY23A, that would imply its current market share is around 0.5%.

From FY23A onwards, I will assume a constant annual growth rate of 4% to account for GDP growth and inflation.

Fiverr’s growth rates

Once the TAM’s size and its growth rate have been projected, the next step is to estimate Fiverr’s future growth. For that, I will estimate its future market share and its revenue share.

Market share: I assume that after some years of post-COVID digestion, the freelancing industry will resume its digitalization process, and Fiverr will benefit from it. I estimate that Fiverr’s market share will continue growing, moving from 0.5% in FY23A to 0.8% in FY28E and up to 1.3% in FY30E. This would imply Fiverr’s GMV to report a c.15% CAGR over the next 10 years, which seems reasonable to me given the current stage of the industry.

To ensure consistency, I propose one combination of “spend per client” and “# of clients” KPIs aligned with the previously stated assumptions about Fiverr’s future market share.

This combination assumes that due to Fiverr’s strategy of going upmarket, Spend-per-Buyer will increase at a 13% CAGR over the next decade, increasing from $278 to $964. While this represents significant growth, it is still below Upwork’s (UPWK) current average ratio of c. $4,700k per client. Similarly, the number of clients will increase at a 1.6% CAGR over the same period from 4.1m to 4.8m.

Please note that this is just one possible scenario and that the core idea is that Fiverr’s penetration within the freelancing market will increase over time.

Revenue share: to estimate Fiverr’s future revenues, it is necessary to make an assumption about the evolution of its take-rate.

While Fiverr has successfully increased its take rate over the historical period, the growth in the large-client segment, which presumably has lower take-rate, will likely push this KPI down in the medium to long term. Consequently, I assume a progressive decline over the period from 31.9% to 30%.

The final result is a topline growing at a c. 14% CAGR over the next decade. This would exceed industry growth of 4% CAGR, thanks to the increase in the penetration of online freelancing.

As explained at the beginning of the article, as the economy recovers and Fiverr’s focus on boosting spend-per-buyer begins to pay off, revenue growth will start to trend up.

Long-term sustainable operating margins

My narrative considers Fiverr as a scalable, capital-light business model. Consequently, as the business grows, its margins will benefit from low direct costs and operating leverage. Nevertheless, this improvement will take time, and it will be directly related to revenue growth.

For our valuation purposes, we estimate operating margins will steadily improve, reaching levels of 22.5% over revenue in the long term. Even though this may be at the lower end compared to more mature software businesses, it should be considered the early stage of the industry in which revenue growth should be prioritized, requiring significant reinvestment levels.

Balance Sheet

As already explained, Fiverr has demonstrated it can adapt its business to the current industry context. In addition, it has a capital-light business model with no significant working capital needs and no need for high-value physical assets.

Consequently, Fiverr’s current net cash position of c. $200m as of Mar 24 allows the Company to properly manage its future operating needs. Unless there is a significant growth acceleration or a drastic change in its stock compensation strategy, there should be no further funding needs.

Valuation

Based on my narrative, I arrived at an intrinsic value of $46.5 per share, which is lower than the $60.8 per share I estimated in my previous valuation almost two years ago, on Aug 10, 2022. As explained before, this results from updating my estimates based on Fiverr’s actual results.

Downside risks

Fiverr is an example of a story-driven valuation in which small differences in estimated probabilities can cause significant differences in prices. Consequently, given the early stage of the company and the industry, downside risks are mostly concentrated in factors that may change the long-term narrative.

Fiverr’s inability to grow up-market, the impact of AI (already commented), regulatory issues, or higher-than-expected competition from the big-tech or specialized platforms are some examples of downside risks that should be monitored when investing in this company.

Nevertheless, as Fiverr continues to grow, the risk of a complete failure diminishes. That’s why, compared to our initial valuation on Aug 22, we have assumed a 0% probability of failure.

Conclusion

In my view, the long-term narrative of Fiverr continues to hold, despite the fact that the results of the last two years might suggest. I believe these are affected by temporary problems, and I found no fundamental reasons to make me change my view. I still consider that the freelancing industry will continue its digitalization process and that Fiverr is well-positioned to benefit from it.

Looking at Upwork’s results, Fiverr’s main competitor, one could infer that it is a widespread problem as, although with exceptions explained by their different go-to-market approach, both Fiverr and Upwork’s actual results and 2024 outlook look very similar.

Consequently, my conclusion is that if you are a long-term, diversified investor who believes that the online freelancing industry will continue growing, Fiverr still represents a very well-balanced risk/reward stock to invest in. The current stock price offers an attractive opportunity with high optionality to be successful in a growing market with immense potential.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of FVRR, UPWK either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Fiverr: Why The Core Story Still Holds Despite Recent Headwinds; Buy appeared first on Up2info.com.

• Fiverr’s first quarter results were deemed quite positive at first glance, but when delving deeper, the picture is still gloomy.
• The marketplace is still stagnating, and no change is expected throughout 2024 as much of the Spend Per Buyer growth is offset by the Active Buyers decline.
• The $100 million stock buyback program may have a much less profound impact on the stock price, and may even negatively affect its earnings.
• Fiverr still needs to prove its growth story is intact. Until that happens, I maintain my ‘Sell’ rating for the stock.

Fiverr International Ltd. (NYSE:FVRR), the online marketplace for freelance services, announced its Q1-2024 financial results on May 9th, enjoying approximately a 10% increase in its stock price in the subsequent trading session, on an above-average trading volume. In the following weeks, the stock continued to experience positive momentum, and by the end of May was up by more than 24%. However, the stock has cooled since then and is down by more than 10% in June, flirting with its post-earnings price of ~$22.00.

Judging by its reaction, the market interpreted Fiverr’s latest results and commentary as net positive. However, as we will see, nothing has really changed in the company’s underlying business, leading me to maintain my ‘Sell’ rating. In this article, I will provide an analysis of Fiverr’s latest results and discuss the recently announced $100 million stock buyback program.

The Marketplace Is Still Stagnating

In Q1-2024, Fiverr generated $93.5 million in revenues, a 6.3% YoY growth, in line with its full-year revenue growth forecast. Moreover, Fiverr generated net income, this time of $0.8 million, yet again with the help of its financial income stream, generating $6.7 million during the quarter. I explained in my previous article how Fiverr’s large portfolio of marketable securities is contributing to this financial income boost. As of March 31st, Fiverr has had $466.8 million of those securities, roughly 44% of its total balance sheet. Later on, we will discuss Fiverr’s liquidity position, which led to the company’s decision to launch a stock buyback.

From a margin perspective, Fiverr’s gross margin was 83.5%, pretty much in line with previous quarters, although its adjusted EBITDA margin was 17.1%, a significant improvement from the Q1-2023 margin of 12.8%. As a quick reminder, Fiverr’s long-term adjusted EBITDA margin is 25.0%, so the company does make progress on that end, yet it’s still unclear when exactly the company will reach the 25.0% margin mark. When asked about it in its Q4-2023 earnings call, the management team refused to provide any specific timeline for reaching that target.

Moving on to the KPIs, perhaps the most important metrics for understanding the health of Fiverr’s business. Starting with Active Buyers, which represent the number of buyers who have ordered a gig on Fiverr within the last 12-month period. This number decreased by 6.2%, the third consecutive YoY decline for the company. More precisely, the last time Active Buyers increased was in Q4-2022, almost 18 months ago. On the other hand, the Spend Per Buyer (“SPB”) increased by 8.4%, its strongest YoY growth since Q4-2022. Per Fiverr’s management team, this dynamic is the result of the company’s focus on higher-value buyers, with larger budgets, which benefit SPB more than Active Buyers. While it sounds like a good step forward, the next KPI pours cold water over it.

Gross Merchandise Value (“GMV”), which is a multiplication of the former two metrics, increased by just 1.7% on a YoY basis. This number is within the 1-2% range of Fiverr’s full-year forecast for GMV growth in 2024. Remember, Fiverr charges 25.5% of each $1 of GMV. This 25.5%, which can also be named “marketplace take rate”, generated ~80% of Fiverr’s revenues in 2023, while the rest of the revenues were generated from other ancillary services. In my opinion, this makes the GMV Fiverr’s most important KPI to follow, as it summarizes the whole marketplace story. As long as Fiverr’s GMV is stagnating, which it is, then marketplace revenues will stagnate as well. And as those revenues stagnate, Fiverr’s entire growth story remains in question.

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(**) In Q2-2021 Fiverr increased its take rate by 50 bps to 25.5%.

On a positive note, Fiverr expanded its overall Take Rate to 32.3%, up 190 basis points from a year ago. As the company’s management team explained during the earnings call, this expansion is again attributed to value-added services such as Promoted Gigs and Seller Plus, which continue to demonstrate strong growth. I do expect this overall take rate to surpass 33% in 2024, yet with an important caveat that the value-added services may contract very fast if the buyers’ side hits the brakes. Judging by the stagnating marketplace, such a scenario cannot be ruled out.

Fiverr also provided updated guidance for 2024. However, it just raised the low end of its revenue and its adjusted EBITDA by a negligible $2 million each:

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Although a better midpoint is positive, the high ends remain the same across the board. Hence, I don’t find this update to have any meaningful impact on my thesis.

Trying to sweeten things up, Fiverr authorized a share repurchase program of up to $100 million in April, and stated during the earnings call that it finds its current stock price an “attractive opportunity”. While on the surface such a move may sound like an immediate tailwind for the stock, I believe investors should consider the flip side of it.

Stock Buyback Program Is A Positive Market Signal But May Be Value Dilutive

In my previous article, I raised a scenario in which Fiverr may consider paying small dividends to its shareholders or doing equity buybacks. Fiverr chose the latter and announced a share repurchase program of up to $100 million. On the face of it, this decision makes a lot of sense as there is a ton of cash and marketable securities on the balance sheet; $766.5 million or roughly 72% of the balance sheet. In other words, Fiverr has too much cash on its balance sheet, as demonstrated by its current ratio, which stands at 3.1. Yes, the company does have a zero-coupon convertible note of $460 million due 2025 which is way out of the money, but with an average free cash flow of $40 million per annum since 2020, I don’t believe there is a material credit risk.

With a current market cap of approximately $875 million, and assuming the buyback has yet to begin (it didn’t, as of May 9th, per the management team), this translates into a gross buyback yield of 11.4%. However, this is where things are beginning to get more tricky. You see, Fiverr is considered to be a growth, tech company, and like many other companies in the sector, is using stock-based compensation as part of its compensation package for its employees, officers, directors, and consultants. We shall focus on two types of stock-based compensation – share options and RSUs – and explain why they may offset a significant portion of the stock buyback;

Fiverr provides us with a detailed table showing how many options are exercisable as of December 31st, 2023, and divides them into different exercise price groups;

As you can see, around 1.4 million options are in the money (“ITM”) considering Fiverr’s current share price of $22.64. More than 75% of these options, or 1.1 million, are exercisable below $15.62, implying a high probability they will be exercised throughout 2024. Moreover, Fiverr’s 20-F also shows that there are as many as 0.6 million RSUs that have been vested in 2023;

For simplicity, we assume that the number of RSUs vesting in 2024 will grow proportionally as the number of RSUs outstanding, implying that 0.8 million RSUs might be vested in 2024.

Now moving on to the catch. At a share price of $22.64, Fiverr can buy approximately 4.4 million of its stock, assuming it doesn’t affect the price and buy all at the current price. On the other hand, assuming 2.2 million new shares will be issued by the company (1.4 million options and 0.8 million RSUs), we get a ‘net’ buyback of just 2.2 million shares, valued at $49.3 million, implying a net buyback yield of just 5.6%, underscoring that the stock buyback may have much less profound impact than initially thought, or in simple words, 50% less of an impact.

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Another important aspect to consider is that the $100 million designated for a stock buyback might be ‘sucked’ out of Fiverr’s marketable securities. During the past 12 months, Fiverr generated $23.7 million in financial income. That income is comprised of many sub-items such as derivatives, exchange rate fluctuations, and others. Still, the vast majority of it is coming from interest income from those marketable securities. Based on an average of $454.5 million in marketable securities Fiverr held during that period, we get to a yield of 5.2% on those investments. In other words, ‘sucking out’ those $100 million for stock buyback will result in an alternative cost of approximately $5.2 million in interest income in 2024, or, assuming a 24.8% effective tax rate, a decrease of $3.9 million in net income, which in 2023 would have completely wiped out Fiverr’s bottom line.

One of the bullish thesis behind stock buyback is that net income will be split among fewer shareholders, increasing the earnings-per-share and even if the P/E ratio stays the same, the stock price will go up because of the former dynamic. The problem with Fiverr, and the reason these drivers are not relevant for it besides the market signaling, is that Fiverr’s net income without the financial income boost may de facto be negative. In other words, by ‘sucking’ $100 million out of its marketable securities, Fiverr may suffer from an alternative cost that will offset any positive impact stemming from a shrinking shareholders’ base. As we can see in Fiverr’s Q1-2024 financial statements, the company was a net seller of marketable securities, reinforcing this option.

Of course, Fiverr may not pull the entire $100 million from its marketable securities and may choose to pull some of it from its bank deposits ($109.8 million) or cash balance ($190.1 million), yet I find it hard to believe that a major chunk of these marketable securities will not be used for that buyback, to maintain a healthy liquidity position.

The Verdict

Fiverr’s Q1-2024 results showed no signs of reaccelerating in its marketplace. On the contrary, it continues to stagnate, despite the management team’s claims that AI has a net positive impact on the business, with complex services accounting for a larger portion of the marketplace. As long as the marketplace stagnates, as reflected through the GMV metric, I don’t see any other driver that can push the top and bottom lines of the P&L that is not related to ancillary services. Although the Spend Per Buyer (“SPB”) metric does show a slight sign of acceleration, the decrease in Active Buyers offset most of it, raising further questions regarding Fiverr’s growth story and the impact AI really has on its business.

In addition, the $100 million buyback announcement may indeed be a positive market signal, underscoring the management team’s confidence in the company and their undervaluation presumption regarding the stock price. However, the buyback yield may end up being much lower than thought due to the company’s intensive SBC activity. In addition, such buyback may probably weigh on Fiverr’s ability to generate real value for its shareholders through bottom-line profits because of the company’s dependency on marketable securities to generate interest income. Don’t get me wrong, I don’t fancy interest income from cash-rich companies; on the contrary, it’s too easy and gives no edge in the long run. I would expect a company like Fiverr to find value-accretive projects that will reignite its growth and shoot up its GMV again. By choosing to do the buyback, Fiverr may incur the alternative cost of interest income, weighing on its ability to generate tangible value for its investors.

Due to the above, I maintain my ‘Sell’ rating for the stock, and will closely monitor the company in the next quarter as well.

Thanks for reading!

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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