FVRR - Fiverr Earnings: Unjust Share Price Plummet Makes For An Even More Enticing Entry

2023-11-07 15:00:06 ET

Summary

• Fiverr International is set to report Q3 '23 earnings on Nov. 9, with analysts expecting adjusted EPS of $0.46 and $91m in sales.
• The company's share price has dropped 16% since August, potentially due to the conflict in Israel.
• Despite the volatility, I maintain a buy rating on Fiverr, with an updated PT of $33.57, representing a 44% discount to its fair value.

Introduction

Fiverr International ( FVRR ) will report Q3 ’23 earnings on Nov. 9 pre-market. I wanted to take a look at what analysts are expecting from the company and give my thoughts on the company’s outlook and what has happened since I last covered the company back in August. With an updated model, after what has happened in the last couple of months, my buy rating remains, however, my Price target has been slightly reduced.

What happened since the last article

Since my last coverage in August, the company’s share price has come down around 16% as of writing update (Nov. 7). The company is currently trading up on no news, which softens the blow for me. In the first article, I argued that the company has a lot of potential when it comes to the total addressable market, and the emergence of AI is going to complement and not replace the company's services. The company’s reliance on adjusted numbers is not ideal, it's justified because of massive stock-based compensation, which brings down the company’s bottom line and margins overall.

The company is from Tel Aviv, Israel, so I don’t think the escalation of the conflict in recent months has helped the company, and I believe the big reason behind the massive stock decline was purely based on this escalation. In the company’s 6-K filing , the company says that there have been no interruptions so far because of the escalation at the border, however, that doesn’t mean it will stay that way. Most of the company’s business is conducted outside of Israel and only a small portion of the team is located in Israel.

Comments On the Outlook

Analysts are expecting adjusted EPS to be around $.46 a share, while expecting the company to lose around $.04 a share on a GAAP basis and to make around $91m in sales.

Below are the company’s updated revenue numbers for Q3 and FY23, which are more or less in line with Seeking Alpha estimates mentioned above.

Q2 '23 saw a nice bump in gross margins of around 300bps, take rate was up almost 1% y/y, while active buyers remained stable at 4.2m. I would have liked to see buyers improving in Q2, however, what helped that metric was the increase in spend per buyer, which saw around a 2% increase year-over-year.

Comments on Q3 outlook

The company over the last three years or 12 quarters has beaten 100% of EPS estimates, while missing three out of the 12 quarters on revenue. There’s a high chance that the company will beat estimates once again as these do look slightly on the lower end, and I don’t think it will be particularly hard to beat these numbers, considering the company raised its guidance outlook once again.

Gross margins already are quite high, so I wouldn’t expect to see much improvement in that area, however, if there is, then that's phenomenal. I would like to see improvements on other margins come through, which would indicate the company is becoming more efficient and profitable.

I would like to see the take rate tick up more than it did in Q2, and certainly would not like to see it coming down. The same goes for active buyers. As I mentioned in my previous article, there's a huge market opportunity to increase buyers and 4.2m seems rather small to me. I would like to see what kind of initiative the management is taking to start to improve the number of active buyers on the platform.

I believe that the new introductions of Fiverr Enterprise, Pro, and Certified all will be great for quality services, however, Fiverr Neo is the one that I will be looking forward to the most to hear how it has performed since its launch for mid-sized to enterprise businesses. Neo is essentially from what I can see an AI-powered chatbot, which helps search for a specific product or service more naturally. Instead of typing out key search words for what the customer needs, they can type out what they're looking for as if explaining it to a person and the AI will try to match your needs to some freelancers that may be the best tailored for that customer. I believe that it's going to drive a lot of traffic and positive results for many, which hopefully translates to higher spending per buyer and a substantial increase in buyers.

Risks

The company is not a stranger to high volatility when it comes to earnings announcements and general share price movements day-to-day. The company’s five-year monthly beta sits at 1.75, which means that if an index like S&P moves 1%, the company’s share price moves almost twice as much, so it's very volatile. As I said at the beginning, the company's share price is up on no news, so expect huge fluctuations and consider buying the stock if you can stomach such fluctuations, as I believe over the long term the company is a good long-term hold.

The escalation of the conflict may continue to affect the share price negatively and even the company's operations in Tel Aviv may be affected, which will bring even more share price fluctuations, so be aware of what is happening on that front before considering investing in the company.

Valuation

I went ahead and updated my valuation model to reflect higher Treasury yields since August (3.9% vs 4.6%) and since the company’s share price retreated quite a bit since then, the risk/reward is even more attractive than before, however, my PT has also decreased, which I will cover now.

In terms of revenues, I went with a conservative outlook, much more conservative than the company’s six-year CAGR of 45%. Below are the revenue estimates for the three cases.

In terms of margins and EPS, I also went slightly more conservative than the analysts , to give myself more margin of safety.

For the DCF analysis, I went with the company’s weighted average cost of capital, or the WACC of 9.6% as my discount and 2.5% as my terminal growth rate.

On top of these estimates, I also added another 15% margin of safety, which I think is sufficient because the company's share price is much more enticing than it was back in August, and I believe most of the bad news is all but priced in, except for the conflict, which is the biggest unknown.

With that said, the intrinsic value of Fiverr is $33.57, which means the company is trading at a 44% discount to its fair value.

Closing Comments

So, my PT has come down slightly since August and now coincidently is in line with a couple of investment bankers at Roth and UBS.

The company’s risk/reward profile is much more enticing than it was in August, and I would initiate a position if the company didn’t go up by over 10% this morning. In my experience it is not a good time to buy after such a quick rally, therefore, I will wait to initiate a position tomorrow (Nov. 8) if it comes down slightly or I will wait until after earnings, once the volatility subsides.

The big worry of the conflict escalating further is going to linger for a while and this may impact the stock prices of many companies associated with Israel. However, as long as the operations of these companies are not affected, then there's no reason to panic, and I believe in the long run, the company will be OK.

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