FVRR - Fiverr Stock: A Buy And Hold For The Next 5 Years

2023-10-12 12:59:59 ET

Summary

• When ChatGPT rose to fame late last year, many investors feared it would bring about the end of Fiverr and its peers.
• Fiverr is embracing AI by offering a diverse portfolio of AI products and services and using AI technology to improve efficiency. Mr. Market did not expect this change in fortunes.
• Recent strategic decisions taken to focus on profitable growth are already yielding promising results.
• Fiverr is attractively valued today - the cheapest it has ever been - at a time when the company is inching toward profitability.

I have been closely following Fiverr International ( FVRR ) for many years. I have booked some gains by trading in and out of Fiverr stock as well, but for the last few months, I have been long FVRR on the back of increasing confidence in the company’s potential to deliver alpha returns in the long run. Fiverr, along with many of its peer freelancing platforms, is facing short-term headwinds that are limiting growth today, but I am convinced that these challenges will be short-lived. A closer look at the long-term industry outlook for Fiverr, its current valuation, and recent strategic decisions has given me the confidence to upgrade Fiverr to a strong buy rating, and I believe the next five years will give ample time for my investment thesis to fully play out, making Fiverr stock a multi-compounder from here.

AI Will Not Kill Fiverr

The rise of ChatGPT late last year immediately dealt a massive blow to freelancing platforms such as Fiverr as investors feared the demand for high-quality freelancers would dry up, with AI promising to replace many jobs. While it is true that AI will have a profound impact on humanity, the initial fears of AI killing Fiverr seem overblown.

Amid the fears of AI disrupting business, Mr. Market did not anticipate AI creating new opportunities for Fiverr to grow. Although the demand for certain professional services such as copywriting may have taken a hit with the increasing prevalence of generative AI, the rise of AI has boosted the demand for new categories such as AI content editing and video creation. Fiverr’s 8 ^th Business Trends Index published earlier this month reveals how the demand for AI-related professional services categories has skyrocketed in the last six months.

Exhibit 1: The increasing demand for AI-related services on Fiverr

There is no doubt that AI will continue to impact the demand for certain professional services. A good example is how AI could decrease the demand for concept art jobs with many businesses now having the option to use AI to handle even complex tasks in this domain. However, AI-generated images, for example, need to be corrected by a professional editor to ensure the client's demands are met accurately. This is something AI will not be able to handle, and therefore, the demand for Photoshop correction services will receive a boost as businesses start using AI to create more content.

Fiverr has been quick to introduce and promote a plethora of AI-related services to ensure the lost demand for some services will be replaced by the surging demand for AI services. AI services on Fiverr encompass a wide range of offerings related to AI development, data analysis, machine learning, natural language processing, and computer vision. Fiverr’s AI strategy is based on two pillars.

1. Fiverr now offers a portfolio of AI services to cater to diverse use cases, including developing chatbots, implementing recommendation systems, processing datasets, creating image recognition models, and AI content editing. The company continues to increase the availability of AI-related services on its platform. This comprehensive portfolio is likely to help Fiverr attract new business clients who are faced with the complex task of integrating AI into their business operations.
2. Fiverr offers businesses the option to remotely work with AI experts in different parts of the world. This diversity allows clients to choose experts that fit their budget and requirements. Small and medium-sized businesses, startups, and entrepreneurs can find affordable solutions for their AI needs, making Fiverr an attractive platform for those with budget constraints.

Fiverr’s strategy is to offer a diverse portfolio of AI products and services at an affordable cost. This, in my opinion, is an effective approach to win new clients while helping freelancers offer their services to a broad client base.

In addition to making the most of the increasing demand for AI services, Fiverr is using AI technology to improve the efficiency of its business and the overall user experience on its online marketplace. Fiverr Neo, an AI-powered platform launched by Fiverr in the second quarter, allows for more precise matching between buyers and sellers. Using Fiverr Neo should improve the user experience of buyers immensely, as they are more likely to find the right freelancer to meet their needs without spending hours talking to freelancers on the platform. Fiverr is also deploying AI technology to improve user experience by providing personalized recommendations to buyers, which should lead to more orders per active buyer in the future.

In addition to these improvements to the marketplace, the company is using AI to increase its operational efficiency by automating and streamlining tasks such as quality assurance and customer support.

Overall, Fiverr is embracing AI by offering a wide range of AI-related services on its platform while using this revolutionary technology to improve its efficiency. Fears of AI killing Fiverr, in my opinion, are overblown.

The Appealing Valuation

In my previous article on Fiverr, I highlighted how the company is transitioning from a growth-oriented company to a profit-oriented one. This does not mean Fiverr is no longer focused on growth, but rather, the company is making strategic investments to secure sustainable long-term growth while keeping a close eye on operating margins. I also highlighted how Fiverr is introducing innovative new products to capture business clients. These new products include Fiverr Enterprise, Fiverr Certified, and Fiverr Neo. With these services, the company is trying to prioritize high-value buyers with large budgets and frequent business needs. I believe investing to improve the user experience on the Fiverr marketplace will pay off handsomely in the long run, with the company now seemingly well-positioned to capture business customers. The eventual penetration of this market segment will trigger a new growth phase for the company, where we will once again see double-digit revenue growth.

Exhibit 2: Quarterly revenue growth

As illustrated above, Fiverr’s revenue growth has decelerated in recent quarters, which does not come as a surprise given how the pandemic accelerated revenue growth in 2020 and 2021 when businesses were forced to deal with mobility restrictions and business disruptions that dramatically increased the demand for online professional services. Making matters worse, the slowdown in economic growth in the last couple of years has forced many businesses to pause their expansion plans. Fiverr, commendably, is using this opportunity to focus more on improving the efficiency of its business and to expand into new market segments through new product launches. As illustrated below, the operating margin of the company has improved steadily since the beginning of 2022 even on the back of decelerating revenue growth, which is a testament to the successful strategies implemented by Fiverr to improve its profitability.

Exhibit 3: Operating margin

I believe Fiverr’s worst revenue growth rates are almost behind us, with the company gearing up to benefit from its strategic investments in new products in the coming quarters. The cherry on top is that Fiverr is inching toward profitability, with the company expected to turn a profit this year, which would mark a remarkable improvement from the net loss of $71.5 million reported in 2022.

Amid Fiverr’s steady progress toward profitability, the company is valued at a forward P/E of 14.6 today, the cheapest it has been from a historical viewpoint. The company has hardly been this attractive from a P/S multiple perspective as well. Based on this attractive valuation, I feel comfortable adding to my long position in FVRR today.

Takeaway

As discussed in my previous article, the long-term macroeconomic outlook for Fiverr is favorable. To make the most of this favorable outlook, Fiverr is implementing effective strategies to improve the underlying profitability of the business while simultaneously expanding into new end markets and product categories. At this valuation, I believe Fiverr deserves a place in any growth investor’s portfolio if the investment time horizon is five years or more.

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