FVRR - Fiverr: Reminder Of Q2 What To Look Out For In Q3?

2023-11-06 10:00:00 ET

Summary

• Fiverr's Q2 earnings showed a double beat and raised guidance, causing the stock to initially jump 20%.
• The company achieved profitability for the first time, but revenue growth remains slow.
• Fiverr's new project, Fiverr Neo, an AI-powered chatbot, has the potential to be a game changer for the company.
• As such, we currently rate FVRR as a buy.

Introduction

This week on Thursday the 9th of November, Fiverr International Ltd. ( FVRR ), will release its Q3 earnings. In this article, we will take a look at the Q2 earnings results and I will give you some insights on what to look for in the upcoming earnings report, which will be released pre-market on the 9th of November.

On the 3rd of August, Fiverr International Ltd. ((FVRR)) released its Q2 earnings before the market opened. The stock was up around 20% as a reaction on that day. Unfortunately, the stock has given back all of its gains since then, and the stock is now down close to 30% since then.

Q2 Results and What To Look For

The stock jumped 20% after the release due to the fact the company posted a double beat and raised its guidance. Fiverr posted a GAAP EPS of $0.01, which was $0.12 better than expected. In addition, revenue came in at $89.29M, which is a beat by $122.44K.

The most important thing to take away from these earnings is the fact that Fiverr has been profitable for the first time. This is obviously a huge milestone for the company, which has been focusing on transitioning from growth to profits.

The revenue was up 5.15% year-over-year, which shows that the company hasn't been able to reignite its growth yet. In addition, gross profit has increased 9.29% year-over-year, which is the highest year-over-year increase since Q1 of 2022.

In addition, the gross margin remains very strong, the 82.51% gross margin is the highest since Q3 of 2021. This shows that the company still has pricing power and remains the dominant force in the market. For example, FVRR's main competitor Upwork Inc. ( UPWK ) had a gross margin of 75.75% last quarter.

You could say that 5% revenue growth is too low for a company to be considered an investment opportunity that could be 10x over the next decade. Nonetheless, the valuation has come down significantly and the free cash flow is definitely improving, which is part of the company's turnaround strategy.

As you can see in the chart below, the FCF the company has been generating since Q3 of 2022 is phenomenal. This corresponds to a CAGR of 35.86% over the last 4 quarters, or an increase of over 240%.

Nevertheless, we have to be completely honest with ourselves and revenue has to reaccelerate again. When we take a look at the revenue estimates from analysts, we can see they expect 2024 and 2025 revenue to come in at $420M and $500M respectively. This indicates that Fiverr is currently trading at only 2.12 times its 2024 revenue.

Furthermore, with $46.5M in FCF on a trailing twelve-month basis the company is trading below 20x its current FCF. This is the lowest price to FCF multiple in the history of the company.

Regarding the guidance, the company expects revenue for Q3 to come in at $89.5 million to $92.5 million, representing year-over-year growth of 8% to 12%. Adjusted EBITDA is expected to be $14.5 million to $16.5 million, representing an adjusted EBITDA margin of 17% at the midpoint.

For the full year, they are now guiding for revenue to be in the range of $358M to $365M, indicating YoY growth of 6% to 8%. If they are able to post 8% year-over-year revenue growth in this difficult period while increasing its profitability along the way, I believe this would be a sign of strength from Fiverr and that we certainly shouldn't write FVRR off just yet.

Driving Profits Higher

As mentioned, Fiverr decided to pivot its strategy from growth to profitability due to the uncertain future of the economy and the macroeconomic challenges we are facing.

In my opinion, this pivot to profitability has been the right move for long-term shareholders like ourselves. Nonetheless, once macro conditions improve, I believe it might be wise for the company to get a little more aggressive once again.

In addition, the 2024 revenue estimate is a 15% year-over-year increase, showing that the company could very well be a potential multi-bagger if they are able to reach that 15% revenue growth rate.

Below you can see a model I made based on the PS ratio. This model includes the assumption of a 15% revenue growth year-over-year. In addition, I included an expected 2% yearly dilution.

Obviously, as the company matures it might not be able to grow at 15% year-over-year. Nevertheless, the estimations for 2030 considering the base and bull case look pretty good, if I say so myself.

Maybe you think: "Stock Info, that 6 PS ratio is insane!", well not really, in my honest opinion. If you look at Fiverr's historical PS ratio, you can see that it was close to 5 in March of this year, which is arguably the hardest period the company has experienced since going public.

As you can see in the chart below, the PS ratio has been a lot higher historically, with a valuation of well over 50 at its peak.

A PS ratio of 6 is actually conservative for a company that has gross margins of 82%. There is a close link between gross margins and PS ratios. The higher the gross margin, the higher the PS ratio. These are the PS ratios and the gross margins of some of the biggest companies in the world, for example.

As you see, with a current PS of just 2, only Amazon comes close to Fiverr, but Amazon has gross margins of just 14.2%, versus Fiverr's 82.5%.

So, if Fiverr executes well (that is an important 'if'!), the stock could see both earnings growth and multiple expansion, the twin engines Chris Mayer talked about in his book 100 Baggers.

Driving Growth

Fiverr mentioned at the beginning of the year that they had two focus areas to drive growth.

• Investing in the core fundamentals of the marketplace.
• Continue investing in going upmarket.

Regarding the first point, FVRR wants to improve this to get a bigger reach, they want to accomplish this by driving better discovery, improving engagement and retention, and making the catalog experience better.

Secondly, the investment in the upmarket is to unlock large buyers' wallet share and penetrate a new addressable market.

Let's take a quick look at what Fiverr aspires to be and what they believe is the Future of work. I believe this can be best described by taking a look at the slide below from the company's Q2 earnings report .

Fiverr Neo is an interesting new project that the company announced in the latest earnings call. I believe this could be a big boost for the company in the future, and I'm looking forward to hearing more about it in Q3.

In the earnings call, CEO Micha Kaufman mentioned the following regarding Fiverr Neo :

In general, the fundamental experience of the e-commerce marketplace hasn't changed much over time. Browse, search, listing pages, and buying, these are the basic functionalities any e-commerce site offers today. That is until the launch of Fiverr Neo.

Leveraging the latest large language models, neural networks, and natural language processing, Fiverr Neo fundamentally changes not only the search-to-find experience, moving from a structured catalog experience to a free-form conversational experience, but also drastically changes how the underlying matching is done, the algorithm is not passively taking information based on buyer keywords and action, but has the ability to drive the conversation and pull information from the buyer, to form a more complete view of buyer requirements and generate the perfect matching results. That is a complete game-changer.

Think of Fiverr Neo as having the potential to get infinitely close to a human talent recruiter, only with more data, knowledge, patience, and a far faster turnaround.

So, what exactly is Fiverr Neo? In simple terms, Fiverr Neo is an artificial intelligence ((AI))-powered chatbot that helps buyers connect with the right freelancers for every step of their project.

I will try to summarize Fiverr Neo in 5 small bullet points, as I believe this could be a game changer for Fiverr in the long run as they continue to innovate.

• AI-Powered Tool : Fiverr Neo is a neural network-powered tool designed to tackle the complex task of matching talent with clients.
• Advanced Technology : It uses the latest technology and advanced algorithms to provide faster, better, and more personalized experiences. Resource Management : Fiverr Neo is designed to better assist organizations in managing resources for projects.
• Natural Language Interface : It offers a natural language interface that asks users the right questions at the right time to automate much of the work required during recruitment.
• Part of a Larger Suite : Fiverr Neo is part of a comprehensive suite of professional solutions that Fiverr has developed for medium to large businesses.

As you can see in the slide below, Fiverr Neo is only the latest addition to the Fiverr platform. The company is consistently trying to make the platform better and while this might not drive immediate growth, tools like Fiverr Neo, Fiverr Enterprise, and Fiverr Certified have the potential to become huge growth drivers in the future.

Although the company is focusing on profitability, the company isn't aggressively cutting down on its marketing. In my opinion, this is a good sign. FVRR could have decided to cut marketing expenses in the short term, which would make the earnings look way better in the short term.

Nonetheless, Fiverr remains focused on the long-term, and they know that cutting down on marketing spending could harm them, as they might lose some market share.

As such, Fiverr has been focusing on making its marketing spending more successful. This seems to be working so far as can be seen below.

Conclusion

While growth has been slowing down, it seems like Fiverr is focusing on the right things and has some interesting prospects like Fiverr Neo in the pipeline, which could significantly drive growth in the future. Guiding for a 15% year-over-year growth in revenue for 2024 with the newfound focus on profitability, the stock seems like a pretty good deal right now.

Nonetheless, Fiverr isn't our highest conviction pick. The company has been struggling for over a year now, and it might take a while longer before the growth really picks up again. Once the economy turns, Fiverr could be one of the companies that benefit the most from it, especially with Fiverr business solutions, which focus on larger businesses and potential high LTV customers.

In addition, Fiverr Neo shows that artificial intelligence isn't a threat to Fiverr as some of you might have expected, but rather a tailwind for the company.

As such, we hope to learn more about Fiverr Neo in the upcoming report and see some encouraging numbers regarding revenue growth and potential margin expansion. Nevertheless, it might take some more time before we know if FVRR will be able to turn its business around.

For further details see: