FVRR - Fiverr Is Set To Benefit From The Resilience Of The Freelance Market

2023-06-30 08:50:27 ET

Summary

• Fiverr International Ltd. is a global online marketplace for freelancers that is transforming the way people work together.
• The company also sees AI as a significant opportunity for its target market, with businesses rapidly adopting AI applications.
• The freelancing market is valued at $247 billion in the United States alone, and online platforms like Fiverr are still in the early stages of capturing this market.
• I view the stock as a buy and have an end of year price target of $35 on the stock.

Investment Thesis

Fiverr International Ltd. ( FVRR ) is a global online marketplace that is revolutionizing the way people collaborate and work together. The freelancing market is significant, with a value of $247 billion in the United States alone, and it is still in the early stages of transitioning to online platforms, as the majority of freelancing work continues to take place offline. Fiverr's effective execution instils confidence in its leadership position, although there are near-term challenges stemming from macroeconomic factors impacting small and medium-sized businesses and their spending levels. However, Fiverr's renewed focus on profitability and leveraging margins, despite facing growth challenges in the current macro environment, could boost sentiment if the company continues to successfully implement its plans. I view the stock as a buy and have an end-of-year price target of $35, based on ~2.8x forward EV/sales multiple applied to the 2024E revenue.

Company Description

One of the leading freelance marketplaces, FVRR brings together millions of buyers of all sorts of content, products and services with its network of several hundred thousand freelancers. Its platform gives freelancers an attribution-centric means of growing and maintaining a freelancing business in a world where companies large and small are looking to quickly and efficiently source projects that exceed or don't fall under the parameters of that buyers' capacity.

Q1 Review and Future Outlook

Fiverr's first-quarter results demonstrated solid topline performance, reaching the upper end of the guidance range. However, what stood out was the company's record-breaking quarterly Adjusted EBITDA and margins, which exceeded analysts' expectations. The number of active buyers has remained relatively stable over the past few quarters, but the growth in spending per buyer has slowed down due to macroeconomic factors that continue to impact SMB spending.

I am somewhat encouraged by the stable trends in customer cohorts, with new buyers offsetting the stabilization of older cohorts. However, the challenging macroeconomic conditions are still affecting spending levels across all cohorts, resulting in slower growth of 4% compared to 8% previously. Despite this, management has raised its guidance for 2023 to a growth range of 5%-8%, which I find positive. The management has also emphasized the focus on improving margins and generating free cash flow, leading to an increase in the 2023 EBITDA guidance.

The management has acknowledged that we are currently in an economic cycle, with different segments entering or exiting at different times. As Fiverr primarily serves SMBs, which are highly sensitive to macro pressures, the company experienced the effects of the current cycle early on. However, the company has also started to witness some impact on enterprises, although it took longer for these larger businesses to react to the macro environment. While recent conditions have been relatively stable, management has not observed any significant improvements in the macro backdrop. Companies are still maintaining a cautious approach, leading management to believe that their buyers do not anticipate a swift recovery in the near term.

AI Remains a Positive Contributor

Fiverr's management has discussed the topic of Generative AI and its potential impacts. The company believes that AI represents a significant opportunity for its target market and does not anticipate it displacing freelancers or the need for human input in the long term. In fact, Fiverr is currently experiencing positive momentum in this area. Businesses are rapidly adopting AI applications, and Fiverr is meeting this demand by providing sellers who specialize in building, training, and integrating generative AI, language models, and similar technologies. Furthermore, Fiverr acknowledges that AI has the potential to significantly improve the workflow of its sellers through automation and efficiency gains. However, the company emphasizes that most services will still require a human element, particularly in creative fields such as marketing or design that require a creative touch. It's important to note that the development of Generative AI is still in its early stages, and Fiverr will need to continue executing strongly to alleviate any concerns in this regard.

Large TAM and Growth Runway

In its most recent Company Presentation, FVRR identifies a US total addressable market of $247 billion. The pandemic drove a significant amount of active buyers to the FVRR platform. FVRR enjoys strong retention rates, as the use of the platform is recurring for buyers, while the gigs are purchased individually. Second, more buyers on the platform is beneficial to the FVRR flywheel, as it creates better earnings potential for sellers. Greater earnings potential drives high-quality sellers to the platform, which in turn makes the platform better for buyers. I see international being another driver of growth as the company invests in deeper local product experience. I am also bullish on continued market expansion and expect the company to benefit from a tailwind created by secular moves around the gig economy labor mix shift.

Valuation

My Dec 2023 price target of $35 is based on ~2.8x forward EV/sales multiple applied to the 2024E revenue. I justify the multiple by the positive variance in FVRR growth and cash flow metrics and the large projected TAM. FVRR is a leading brand in an under-penetrated category, as I see it, and it enjoys a sticky active buyer base whose highly attractive rising lifetime value characteristics support opportunities for profitable investment for future growth.

Risks to Target

There are several potential factors that could affect the growth and success of Fiverr, an online freelancing platform, in ways that may not align with initial expectations. These factors include the possibility of a slower-than-anticipated development of the broader online freelancer and buyer community, a lack of appreciation for Fiverr's transactional model within the community, increased competition that puts pressure on growth, take-rate (the percentage of revenue taken by the platform), or profit margins. Additionally, being headquartered in Israel introduces unique geopolitical and foreign exchange risks that may differ from other companies in the industry.

Conclusion

Fiverr has established itself as a front-runner in the emerging trend of transitioning freelancing from offline to online platforms. The freelancing market is substantial, with the United States alone accounting for a value of $247 billion, and it is still in the early stages of transitioning to online platforms, as most freelancing work is currently done offline. Fiverr's strong execution inspires confidence in its leading position, despite facing near-term challenges due to macroeconomic factors affecting small and medium-sized businesses and their spending levels. I am bullish on the stock and view the stock as a long-term buy.

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