FVRR - Fiverr: Great Value After An Expensive Roundtrip

2023-09-10 05:44:43 ET

Summary

• Fiverr stock dropped 91% from its all-time high and its now trading near its IPO price.
• However, the business has continued to grow, costs have been reduced, and profitability is up.
• In the latest quarterly report, they raised their guidance for revenue and adjusted EBITDA for the full year.
• We believe shares are trading at attractive multiples and that company can become a stable compounder over the next few years.

Investment Thesis

Fiverr International ( FVRR ) is a global online marketplace that connects sellers offering a wide range of services with buyers seeking those services. The platform spans approximately 600 categories across ten verticals, encompassing areas such as graphic design, digital marketing, writing, video production, and more.

The stock dropped 91% from its all-time high and is now trading near its IPO price. However, the business has continued to grow, costs have been reduced, and profitability is up. We believe shares are trading at attractive multiples and that the company can become a stable compounder over the next few years.

Financial Results

Fiverr reported its Q2 2023 financial results on August 3. Revenue came in at $89.4 million, up 5.1% YoY, driven mainly by growth in spend per buyer and also a higher take rate, which grew to 30.7% TTM from 29.8% for the twelve months ended June 30, 2022. Active buyers remained flat YoY in 4.2 million, while spent per buyer TTM increased 2% YoY to $265 from $259.

Although Fiverr is having a hard time growing active buyers, they have a very large base of repeat customers. The percentage of core marketplace revenue coming from repeat buyers continued to climb, reaching 65% for the last twelve months ending June 30, 2023, compared to 64% last quarter.

GAAP gross profit for Q2 was $73.8 million, up 9.3% from $67.5 million in Q2 22. Given that it grew more than revenue, the gross margin increased 310bps to 82.5% from 79.4% a year ago.

In an effort to reduce costs and enhance profitability, Fiverr's operating expenses decreased by 29.3%, dropping from $110.1 million a year ago to $77.8 million today. However, this significant reduction is primarily attributed to a $27 million impairment of intangible assets recorded a year ago. Excluding that charge, expenses only decreased by 5.7%, with all of the reduction being attributed to sales and marketing.

It is evident that they are not significantly cutting down expenses, but rather keeping the costs constant while improving the gross margin and growing revenue. In marketing expenses, instead of making drastic cuts, they placed their emphasis on enhancing their marketing return on investment ((ROI)). The company's investments in performance marketing, specifically the direct variable costs associated with acquiring buyers, have shown continuous improvement over time, signifying a promising trend.

As a result, operating income was -$4 million, but the company managed to post a net income of $0.2 million thanks to interest income. Adjusted EBITDA was $15.3 million, or 17.1% of revenue in Q2 23, compared to $4.6 million or 5.4% in Q2 22.

They ended the quarter with $353 million in cash, equivalent and marketable securities, compared to $454 of debt in the form of convertible notes.

New Products

In recent years, Fiverr has been focusing on expanding its offerings for medium and large businesses. Over the past few months, they have announced several product launches, including Fiverr Enterprise , Fiverr Certified , Fiverr Neo , and the all-new Fiverr Pro, all bundled together into a suite of products called 'Fiverr Business Solutions.'

Fiverr Enterprise is a Software as a Service platform designed to streamline companies' interactions with freelance and contract workers. The platform offers services such as freelancer sourcing, onboarding, and ensuring compliance with regulations.

Fiverr Certified is a partnership program aimed at fostering strong relationships with Small and Medium-sized Business service providers on the platform. Fiverr will oversee the marketplaces of Certified businesses, allowing these providers to dedicate more time to their work and less to marketing efforts.

So far, the program has already attracted several of the world's most recognized brands, including major partners such as Amazon Ads, monday.com, and Stripe. The average project size on Fiverr Certified ranges between $700 to $800, which is significantly higher than the marketplace average.

Lastly, Fiverr introduced Fiverr Neo , a freelancer matching tool designed to connect freelancers within the Fiverr platform with buyers seeking specific services. In other words, it allows buyers to articulate their needs in their own words and also enables communication with the buyer by asking additional questions based on the buyer’s unique project requirements. Fiverr Neo aims to provide recommendations for the best talent to fulfill the buyer's intended job.

Outlook

Fiverr raised its guidance of revenue and adjusted EBITDA for the full year. They now expect revenue to come in between $358-$365 million vs $355-$365 million before and adjusted EBITDA to be between $56 milling and $60 million vs $48-$56 million before.

Valuation

Fiverr was everything but a value play during the 2021 bubble. However, shares have come down significantly since and are trading near their IPO price.

When compared to its closest competitor Upwork ( UPWK ), we can see that Fiverr is not that expensive. It is currently trading at a 22.5x EV/EBITDA (using FY 23 guidance) compared to 37.7x for Upwork.

Also, it is worth noting that Fiverr will generate more adjusted EBITDA in 2023 than Upwork, despite having only half of the revenue they do. This speaks to the cost control and operational efficiency that Fiverr has been implementing.

Risks

The stock dropped from ~$325 per share in 2021 to just $29 today. This represents a 91% drawdown from all-time highs, which burned a lot of investors who now won't touch the equity even with a stick.

Additionally, despite all the tailwinds of the 'gig economy,' a potential recession could severely impact Fiverr and put pressure on profitability, take rates, and margins. The company has a strong balance sheet to weather such a storm, but it will affect the equity for sure.

Lastly, we should consider that there is fierce competition in the sector, and while Upwork may seem like the largest competitor, there are many smaller firms trying to take market share from them and grow.

Takeaway

To sum up, Fiverr has pulled itself together and is now on a path of profitable growth. Although some risks persist, indiscriminate selling may have created a great opportunity to buy shares for the long term.

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