FVRR - Fiverr Vs. Upwork: Which Is The Better Bet On The Freelancing Revolution

2023-04-19 06:45:17 ET

Summary

• Both Upwork and Fiverr have positioned themselves to greatly benefit from freelancing's increasing popularity.
• The global freelancing industry is expected to reach $9 billion by 2026, with a forecasted growth rate of 15.3% between 2021 and 2026.
• We share which of the two companies we believe is a better bet, even if it is a close call.

As Freelancing becomes an increasingly popular way for people to earn income, the main platforms are positioned to greatly benefit. Two of the most well-known platforms are Fiverr ( FVRR ) and Upwork ( UPWK ). So far, however, both companies have significantly underperformed the popular technology Invesco QQQ Trust ETF ( QQQ ) since their IPO's, despite both experiencing massive runs during the post-pandemic period.

There are a couple of reasons for this. First, both companies IPO'd at relatively high valuations, and second, growth has significantly decelerated recently. Still, at the now much lower valuations, and with the freelancing market still growing and holding enormous promise, it is a good time to analyze both companies and see which one is the better bet on the future of Freelancing.

Both companies are benefiting from workers' desire to work from anywhere, and from companies finding it convenient to only pay for action and results, and scale spending up or down according to business needs. What is important to remember is that both Upwork and Fiverr are two-sided market places that had to reach critical mass in order to be able to operate successfully, and this results in a good competitive moat. Potential competitors will find it difficult to get the necessary scale to compete effectively. To get an idea of the momentum both of the platforms have attained, we can look at their website visits according to SimilarWeb. For example, Fiverr has roughly 66.7 million visits per month and ranks as the #548 most popular website in the world.

For its part, Upwork has about 50.8 million visits per month, and ranks a bit lower at number #682 of the most popular websites in the world. With this number of visits it is clear that both platforms have reached a level of popularity that basically guarantees that a good amount of business activity will take place on their marketplaces.

Attractive Industry

In addition to being an industry that favors a handful of players that are able to attain the necessary scale to compete, the global Freelancing industry is also attractive because of its size and growth. Globally it is projected to reach $ 9 billion by 2026, forecasted to grow at a CAGR of 15.3% between 2021 and 2026.

A second benefit these two platforms can expect with respect to their industry is the transition from offline freelancing to online. This transition, which should play out over the coming decades, should keep growth at a good level for both marketplaces. This is not even considering the expansion of freelancing itself, as more and more workers and companies prefer the flexibility of this working model. This is particularly true for some of the creative areas of the economy, such as graphic design, software development, etc.

Business models

As already mentioned, both marketplaces benefit enormously from network effects, given that clients will gravitate to the platforms that have more and better freelancing talent, and workers will go where there are more customers and more interesting projects to work on. Both companies have a powerful business model with high take rates, which vary depending on several factors but are well above 20%. They also benefit from having the majority of revenue come from repeat buyers, reducing marketing costs. What makes the business model even more attractive is that it can be replicated in international markets, further increasing the size of the available market.

Still, both companies are reinvesting most of their cash flows into accelerating growth to maximize the benefits and competitive advantages that their business model flywheels bring. As can be seen in the graphs below, both companies understand the importance of growing both sides of their marketplaces to gain competitive advantages.

Financials

One area where Fiverr clearly has the upper hand is in terms of profitability, being much closer to GAAP profitability than Upwork. Their non-GAAP margins, especially their non-GAAP adjusted EBITDA margins are higher, both one big reason is because of stock based compensation being ignored. In any case, the clear winner here is Fiverr.

Surprisingly, Fiverr is a little bit less optimistic about its long-term profit margin potential, aiming for a 25% adjusted EBITDA margin in the long run.

For its part, Upwork is targeting 30 to 35% adjusted EBITDA margins, which is surprising given that currently Fiverr is showing better profit margins.

Growth

In terms of revenue, Upwork is the bigger company with almost 2x that of Fiverr. Fiverr, however, has historically grown at a faster pace, with the exception of recent quarters where Fiverr's growth really declined. Still, we believe that Fiverr's gigs model is easier to scale than Upwork's longer duration projects. We therefore believe that Fiverr's model has structurally superior growth, and that recent low growth is mostly due to tough comparables. If this persists for a few more quarters, we would then reconsider whether Fiverr's high growth potential has been impaired.

Valuation

At first glance, it would appear that Fiverr is considerably more expensive than Upwork given that it trades at almost twice the EV/Revenues multiple. We believe the difference in multiple is probably warranted given Fiverr's higher profit margins, and historically faster growth.

A better way to gauge the valuation is looking at the expected profitability down the road. In this regard they are trading at extremely similar multiples of analyst's FY2025 earnings estimates.

As can be seen in these tables, both companies are trading at ~15x 2020 EPS estimates. Their estimates for sales growth, especial for FY2024 and FY2025 are also quite similar, close to 20%. For this reason we believe the valuation factor is a tie between the two companies. We also think that their share price declines have now rendered the valuation quite reasonable for both companies, after being overvalued during the post-pandemic period.

Risks

Both businesses remain quite risky, as they have yet to become solidly profitable, especially to a degree that justifies their share price today. Even if looking a few years out at earnings estimated it does seem that the valuation is relatively reasonable. There is also the threat that one of the technology giants might decide to enter the space. Still, the biggest risk is probably that the freelancing industry could fail to deliver the expected growth, or that the transition to online freelancing might take much longer than expected.

The Verdict

All things considered we believe Fiverr to be a slightly better option to bet on the growth of the freelancing sector. The main reasons being that it has made more progress on the profitability front, and that historically it has delivered higher revenue growth. It is a close call, with both companies trading at a similar valuation, at least when judged on earnings estimated for FY2025. Upwork could also surprise if it does work to improve its cost structure, given that it already has very high revenues.

Conclusion

Both Fiverr and Upwork are attractive Freelancing platforms with significant competitive advantages, mainly the result of network effects. They have both reached critical mass and are well positioned to benefit from growth in their industry. Fiverr has better profit margins and has delivered higher revenue growth historically. In terms of valuation, the way we see it is that there isn't that much a difference, and that they are both trading at reasonable multiples of future earnings estimates. We slightly favor Fiverr, but both companies appear to be a reasonable way to bet on the future growth of the Freelancing industry, and its migration to online. We therefore plan to continue following both companies closely.

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