FVRR - Fiverr Q3 Results: Growth Is Stalling

Summary

• Fiverr's growth appears to be stalling, particularly the number of active buyers on its platform.
• The company has made some improvements to its profit margins, and while it is adjusted EBITDA profitable, it is still unprofitable based on GAAP profits.
• Shares appear reasonably valued, but we don't think shares will go much higher unless the company manages to re-ignite growth.

We believe shares reacted positively to Fiverr's (FVRR) Q3 results mainly because expectations were very low and the share price has significantly declined in the past year. Our main concern is that growth appears to be stalling, with several quarters in a row where the number of active buyers remains stagnant. The modest growth the company is delivering is coming from less sustainable sources, mostly increases in the take rate and average spend per buyer.

For Q3 revenue came in at the high end of the company's previous guidance, and Adjusted EBITDA was meaningfully above guidance. The company is taking steps to improve profitability, and talked about being more disciplined in its spending. Other highlights for the quarter include the company introducing a partnership with Shutterstock ( SSTK ) to integrate their large library of high quality royalty-free licensed assets into sellers' offerings.

The company is also putting more effort into its internationalization initiatives, especially in Germany, France, the U.K. and Australia. While Europe is more severely impacted by high energy prices, inflation and spending capacity, the company believes these countries are strategically important, with large existing freelancing markets.

Q3 2022 Results

The graph below shows the key Q3 2022 results. Revenue increased 11% y/y to $82.5 million and Adjusted EBITDA was $6.6 million or 7.9% in Adjusted EBITDA margin. The company had another big increase in the take rate, mostly as a result of the growth in promoted gigs. Take rate for the quarter was 30% in Q3, representing a y/y expansion of 160 basis points. While a higher take rate is positive for the company, we believe there is a limit as to how high it can go before Sellers in the platform start resenting the company.

During the earnings conference call the company mentioned that it feels confident with its ability to improve EBITDA next year.

Financials

Looking at revenue for the last few quarters it becomes clear that growth is stalling. This is disappointing given the opportunity that the freelance market offers, and particularly given how much the company spends in sales and marketing.

While it has come down slightly in terms of percentage of revenue, Fiverr is still spending ~45% of its revenue in sales and marketing. This is a huge percentage of its revenue, and one would think that the company could deliver more than low double digit growth with that kind of investment in promotional activities.

Net loss on a GAAP basis in Q3 was $11.4 million, compared to $14.3 million in the third quarter of 2021. Adjusted EBITDA was $6.6 million, or 7.9% of revenue in Q3, compared to $7.3 million or 9.8% in the third quarter of 2021. As a reminder, the company has a long-term adjusted EBITDA margin target of 25%. The main reason for the difference between the Adjusted EBITDA profit, and the GAAP loss, was due to share-based compensation, which remains very elevated at Fiverr.

Growth

Active buyers were 4.2 million, up 3% year-over-year. This is currently our main concern with the company. Active buyer growth, in our opinion, is the most important source of growth for the company and the most sustainable. There has been very little growth on this front for several quarters now, making us believe that growth is stalling.

Spend per buyer for Q3 was $262, up 12% year-over-year. We have to give credit to the company here, as it has done a good job getting customers to spend more money on average.

Balance Sheet

The balance sheet remains healthy, with $152 million in cash and cash equivalents at the end of the quarter. The balance sheet also shows $222 million in marketable securities (short term investments). At the end of the quarter the company had $460 million in long-term liabilities, mostly resulting from its convertible notes.

Guidance

For Q4 revenue is expected to be $79.8 million to $85.8 million, representing y/y growth of 0% to 8%. Adjusted EBITDA is expected to be $7 million to $8 million, representing an adjusted EBITDA margin of 9% at the midpoint.

For the full year of 2022, Fiverr expects revenue to be in the range of $334 million to $340 million, representing y/y growth of 12% to 14%. Adjusted EBITDA is expected to be in the range of $22 million to $23 million, representing an adjusted EBITDA margin of 6.7% at the midpoint.

Valuation

After having reached an extreme level of overvaluation, with the EV/Revenues multiple surpassing 60x, the valuation has come down to much more reasonable levels. EV/Revenues is currently ~3.6x, although it is difficult to consider this multiple cheap considering that growth is stalling. At the moment we believe shares are fairly valued, and we would have to see Active Buyers growing meaningfully again to become more positive on the company.

While no longer in the triple digits, forward EV/EBITDA remains relatively high at ~56x. The company is expected to grow earnings at a rapid pace, so we are not overly concerned. What we do think is that whether this multiple is cheap or not will depend on whether the company can re-ignite growth.

If analysts turn out to be correct on their estimates, it could be argued that shares offer some value, given that based on 2024 earnings estimates the price/earnings ratio is an undemanding ~17x.

Risks

We believe that as the online freelancing category continues to grow it might attract more competitors, making growth harder for the existing players. For the time being Fiverr together with Upwork ( UPWK ) still dominate the category. One thing to note is that short interest remains higher than that of the average stock. In any case, we believe that the main risk to investors is stalling growth, and the impact this has on the valuation.

Conclusion

While Fiverr delivered results ahead of previous guidance, we were still disappointed with the level of growth, in particular the lack of growth in Active Buyers. While the valuation looks quite reasonable, we believe it will be necessary for the company to re-ignite growth to really get the shares moving higher. We are less optimistic about the company than we were in the past given that growth seems to be stalling, and we are therefore changing our rating to 'Hold'.

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