FVRR - Fiverr: This Uncertainty Makes Me Cautious

2023-09-05 06:42:35 ET

Summary

• I remain cautiously optimistic about Fiverr's prospects, with its stock priced at a reasonable 11x next year's EBITDA.
• Fiverr's platform connects freelancers and clients across a wide range of digital services, offering convenience and accessibility.
• While recent growth rates appear robust, maintaining a 20% CAGR in 2024 seems challenging, increasing the focus on profitability.

Rapid Recap

In my previous analysis back in June, I said :

[...] no matter how we slice and dice Fiverr's analysis, we get the same conclusion. Yes, Fiverr is a lot cheaper than it was several years back, but its platform is also far from thriving.

It's a case that Fiverr today is cheap. But it's cheap for good reasons.

I stand by that comment today. According to my updated estimates, Fiverr ( FVRR ) is priced at 11x next year's EBITDA. The business is clearly a lot cheaper than it once was. But at the same time, it's not thriving to the same extent that it once was.

Accordingly, I remain neutral on this name. Note, that neutral does not mean bearish, neutral is exactly what it says.

Why Fiverr?

Fiverr serves as an internet-based marketplace linking freelancers to clients in search of diverse digital services. This platform offers an array of services, encompassing graphic design, digital marketing, and programming, among others.

Fiverr furnishes a user-friendly platform that grants both individuals and enterprises easy access to professional services while simplifying the payment process for freelance work.

Moving on, I've consistently made the case that Fiverr is being too aggressive with its take rate, far beyond industry averages, and that this will end up cannibalizing its customer adoption curve.

Case in point, in June I said:

I believe that by consistently raising its take rate, Fiverr is actually cutting into its own moat. Why?

Because freelancers can just as effectively sell their services on competing platforms, that undercut Fiverr.

At the time I wrote that analysis, I received pushback on this line of thinking. And now that Fiverr's recent results are out? Active buyers were up 0% y/y. For a two-sided marketplace to thrive, you need the spin wheels moving positively on either side. That's the definition of a successful marketplace, more services and more buyers targeting those services. And what you see at Fiverr is a stagnation of its value proposition.

Instead, Fiverr continues to aggressively rely on increasing its take rate. That's not going to provide this business with any sort of moat. Remember Jeff Bezos' famous quote? Your margin is my opportunity.

Fiverr's Growth Rates Are Stabilizing

On the surface, Fiverr's growth rates appear to be accelerating at a substantial clip. However, that's for the most part because Fiverr's comparables with the prior year are so easy to compare against.

However, as we look forward ahead and form a view on 2024, it appears that Fiverr will no longer be delivering 20% CAGR.

A line of reasoning that is supported by analysts' consensus revenue estimates.

Even if these estimates turn out to be conservative, I believe that Fiverr is unlikely to grow by 20% CAGR in 2024. Accordingly, given its slower growth rates, investors will be increasingly attentive to its bottom-line profitability. A key focus of our discussion in the next section.

Valuation - Not Expensively Valued

Even if Fiverr ends up delivering $70 million of EBITDA this year and grows its bottom line by 20% next year to around $85 million, this would still leave this stock priced at about 11x forward EBITDA.

Clearly, that's not an expensive valuation. The problem here is that this is one of those instances where a stock is cheap for a reason. Because its growth rates have moderated.

Looking at the brighter side, it's essential to acknowledge Fiverr's exceptionally robust balance sheet. With a business that consistently generates substantial free cash flow and a strong balance sheet to support it, Fiverr stands well-positioned to actively pursue substantial, game-changing M&A opportunities. These could include acquisitions within its peer group or even ventures into entirely new verticals, potentially with a strategic focus on AI integration.

The Bottom Line

Reflecting on my previous analysis from June, I expressed reservations about Fiverr's current state, emphasizing its affordability but also its apparent struggles. This sentiment remains unchanged today. Despite my updated estimates suggesting that Fiverr is priced at a reasonable 11x next year's EBITDA, it's clear that the platform isn't thriving as it once did.

I maintain a neutral stance on this stock, which signifies my uncertainty rather than my bearishness.

I've consistently voiced concerns about Fiverr's aggressive take rate strategy, which may hinder its customer adoption. Recent results indicate stagnation in its value proposition, mainly due to this approach.

As for growth rates, while they may appear robust on the surface, sustaining a 20% CAGR in 2024 seems unlikely. This shift in growth dynamics will likely shift investor focus toward profitability.

In terms of valuation, Fiverr's stock, while reasonably priced, is facing moderation in growth rates, which is the primary reason for its affordability.

However, Fiverr boasts a strong balance sheet and consistent free cash flow generation, providing ample room for strategic moves, potentially including transformative M&A in related or even entirely new sectors, with a possible AI-centric angle.

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