Thursday Deep Dive: Fiverr
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This week for our Deep Dive, Ian, Ryan, and I discussed Fiverr. The company is based in Israel and is an online marketplace that connects freelancers to potential clients. It is called Fiverr (pronounced “Five-er”) because the original idea was to get a service for as little as five dollars. Using Fiverr, independent developers, designers, and other remote workers post their qualifications and what jobs they are looking for while the buyers “shop” for freelancers using Fiverr’s search algorithm. After the job is done to both parties’ satisfaction, the freelancer gets paid and Fiverr takes a cut.
Fiverr launched out of Tel Aviv in 2010 and was founded by Micha Kaufman and Shai Wininger. Our research into their history found they have been fairly quiet before IPO-ing in 2019. The only notable fact about their history is that Amazon took legal action against the company in 2015 for freelancers writing fake reviews on the site. Nothing has come up recently from that though.
Industry and Competition
Fiverr competes in the emerging online marketplace industry, but also competes with traditional “analog” freelance businesses.
On the 20-F, Fiverr identifies Upwork and TaskRabbit as larger online players. Upwork is the largest company by revenue in the industry, with over twice the revenue of Fiverr if looking on a trailing basis. The difference between Upwork and Fiverr (at least, according to the 20-F) is that on Upwork buyers advertise a job but on Fiverr the freelancers advertise their skills.
The entire freelance industry is booming right now. There are currently 57 million of these workers just in the United States, with 70% working on over two projects at a time. That is a big tailwind for companies like Fiverr, Upwork, and TaskRabbit.
Founder Micha Kaufman is still on at CEO, so if you like founder-led businesses, this may be a nice positive for you. In his talks and conference calls, Kaufman harps on the fact their biggest competitor is the offline market, and that is where they can gain market share. He also makes clear that Fiverr is not exploiting workers like Uber and Lyft because the workers identify as freelancers and know they won’t have the same benefits as salaried work. It may be one of the few parts of the gig economy where workers and management are on the same page.
Fiverr has around 20% insider ownership, and Kaufman owns about 5% of the business. This is important for shareholders because it incentivizes Kaufman to try and increase the value of Fiverr the business (and in the long-run, the value of the stock), aligning the two parties’ interests.
Valuation, Earnings, and Balance Sheet
Valuation (as of recording):
EV of $5.3 billion
EV/sales of 38
MA EV/sales of 58
MA EV/sales is our internal metric called “margin-adjusted EV/sales.” All it takes is the current EV and divides it by trailing gross margin and sales growth to adjust for how healthy the business is. We like to use it when a company is not profitable or cash flow positive.
Earnings (2020 numbers):
Q2 revenue of $47.1 million, up 82% YoY
83.1% gross margins
Net income was break-even
Active buys of 2.8 million, up 28% YoY
Spend-per buyer of $184, up 18% YoY
Take-rate of 27% (take rate is what Fiverr collects from GMV)
$170 Million in Cash & Equivalents
Recently did a secondary offering of $120 million
Current ratio of 2.5
Likely won’t need to raise additional funds since they are cash flow positive
Does Fiverr Have any Competitive Advantages?
We had trouble finding any strong competitive advantages for Fiverr. Ian came up with a possible “data” advantage, but we agreed that if they had it, it wouldn’t be much of a profit-driver. I thought they may enjoy some network effects and the benefits of running an internet marketplace, but we agreed it wouldn’t be difficult for someone to pour a few billion in and level the playing field.
What are Fiverr’s Future Growth Opportunities?
Here are the three future growth opportunities we chose for Fiverr:
Marketing via social media. This was Ryan’s choice and one that makes sense for Fiverr’s target demographic of independent freelancers. Partnering with popular Instagram or YouTube brands could lower Fiverr’s CAC while creating a funnel for new creators to sell their services.
Slowly moving upmarket. I chose this one because the executives mention it often on conference calls. The best indicator to see if they are growing this overtime is the average spend per buyer, which grew 18% last quarter. Here is a quote from the latest conference call: “First, a path to going upmarket for both supply and demand in our marketplace. On the buyers side, not only is Fiverr relevant for entrepreneurs, individual contributors and office heroes, but we will become a working hub for teams inside companies and businesses to collaborate with external resources integrated into their day-to-day workflow.”
Expanding to non-English speaking countries. This was Ian’s choice. They have run into problems going cross-border and into different languages, and executives have talked about investing in R&D to reduce friction between buyers and sellers globally.
What We Liked About Fiverr
We all came to the conclusion that, because of industry tailwinds and the nature of the online marketplaces, Fiverr is a quality business. It looks like they should have fat cash flow margins at scale (80%+ gross margins tend to bring that), but the key will be lowering sales and marketing expenses as a % of revenue over time.
Another highlight was Fiverr’s entrance into the market as the best place to grow your “side-hustle,” appealing to smaller sellers. This allows them to grow the supply of users quickly and then build out the tools for larger freelancers over time, slowly eating Upwork’s market share.
What we Didn’t Like About Fiverr
My concerns with Fiverr are that they don’t have much of a competitive advantage outside of the two-sided marketplace effect. I also don’t like how much they are spending on marketing at the moment, but do like that it is coming down rather quickly.
Ian was worried that since Fiverr has such a high take rate (27%), they are at risk of margin pressure from the competition. 27% is a high cost for the value Fiverr provides to its sellers, and a high capitalized competitor could come in and offer the same services with a 10% cut. Or, at least we think they could.
Lastly, the valuation is a concern. 38-times revenue is no laughing manner, and you need to believe Fiverr can grow for years to come to justify the valuation.
Links to Further Reading/Learning
Disclosure: Authors are not financial advisors. Anything written on Chit Chat Money is not formal advice or a recommendation.