Fiverr: A 5 bagger in 10 years?

I recently bought shares in Fiverr, a marketplace which connects companies with freelancers because I’m increasingly drawn to small but fast growing platforms. Platforms such as Fiverr benefit from wide moats because of their network effects and are highly scalable businesses because most of their costs are fixed costs.

Here’s a description of Fiverr from their IPO prospectus:

“Imagine a world where businesses can buy a digital service online — graphic design, website creation, marketing services, or hundreds of others — as quickly and reliably as buying something on Amazon.

Imagine a world where anyone with a skill is no longer limited to offering their skills only to the people and businesses in their network or their close proximity.

Welcome to Fiverr, and welcome to the future of work.”

Micha Kaufman, Fiverr CEO

Fiverr was founded in 2010 by Micha Kaufman who faced challenges finding, evaluating and negotiating prices for freelance work. Fiverr’s platform allows buyers to purchase Gigs such as logo design, video creation or website development at a fixed price starting from just USD5 to thousands of dollars with just a few clicks. This approach is different from competitors such as Upwork which are focused on larger enterprises and require buyers to submit a scope of work and to invite bids for the project. Each Gig on Fiverr is listed with a defined scope and timeline and is sold for a fixed price rather than on an hourly basis.

Fiverr mobile app

Source: Fiverr 2019 annual report

Here are 5 reasons why Fiverr can grow quickly over the next 10 years.

1) Proven ability to grow and repeat buyers

Transaction fees make up the bulk of Fiverr’s revenue but repeat buyers made up 58% and 57% of the company’s revenue in 2019 and 2018 respectively. Buyers pay a 5% fee while sellers pay a 20% fee for each order. While a 20% take rate for sellers may seem hefty, sellers are incentivized to stay on Fiverr because the platform makes it easy to sellers to find and win Gigs while ensuring payment certainty.  Fiverr’s reviews and rating system allow buyers to assess the quality of sellers making it easy for buyers to search relevant gigs.

The following chart presents the behaviour of Fiverr’s annual buyer cohorts with the total spend of each annual cohort staying broadly consistent after the first year.

Fiverr annual cohort spend

Source: Fiverr 2019 annual report

Meanwhile, the majority of new buyers on Fiverr are acquired from non-paid, organic sources. This is complemented by performance marketing. Fiverr has been able to achieve a return on investment from its performance marketing usually within 7 months.

Fiverr was only listed in 2019 so the company only has a short financial track record but the numbers look promising.

USDm	Revenue	Gross profit	Net profit	Operating cash flow	Free cash flow	Net cash	Diluted shares (MM)
2017	52	39	-19	-5	-9	58	N/A
2018	76	60	-36	-52	-53	52	N/A
2019	107	85	-34	-14	-16	33	21
LTM	139	112	-22	0	-2	195	33

Revenue compounded at 43% per year from 2017-19. For the first half of 2020, growth accelerated with revenue growing 65% year on year. Fiverr isn’t profitable yet but the company is rapidly making progress with operating cash flow breaking even during the last 12 months. For perspective, mature platform companies such as Etsy have achieved 30% free cash flow margins so Fiverr should be a very profitable company at scale.

2) Secular shift to online retail will be a tailwind for Fiverr

The ongoing secular move to e-commerce will result in greater demand and more work opportunities for Fiverr sellers who typically specialize in skills desired by online retailers such as website/app design and graphics design. Growth has accelerated with Fiverr growing revenue 82% year on year in the second quarter compared to 44% in the first quarter. Fiverr has identified a USD100 billion addressable market in the United States alone compared to the company’s USD139 million of revenue in the last 12 months. Fiverr’s company’s addressable market should continue to increase as Fiverr is already present in 160 countries. During a 2019 interview with Globes, Fiverr’s CEO said 90% of the freelance work is still sourced offline and manually.

3) Network effects

Third, Fiverr has been benefiting from network effects which has resulted in more active buyers and greater spend per buyer. The number of active buyers and spend per buyer on Fiverr’s platform has been growing rapidly. Spend per buyer has more than doubled to USD184 over the last 12 months from 2016 levels while the number of active buyers has been consistently increasing over the last 3 years.

As the buyer community grows, it attracts more experienced freelancers who in turn attracts more buyers. Although Fiverr already offers more than 400 different services, Fiverr is constantly expanding its range of services which should attract more buyers – accelerating the growth flywheel.

4) New revenue sources

Fiverr is introducing new sources of revenue which will make Fiverr a more vibrant ecosystem for freelancers and buyers. “Promoted Gigs” is a Fiverr advertising tool that allows sellers to market their services.  “Fiverr Learn” is an online learning platform with course content in categories such as graphic design, branding, digital marketing and copywriting.  Fiverr is also building financial tools to help freelancers get early payouts on their earnings.

Fiver’s “Promoted Gigs” look promising given its profit margin potential and the popularity of seller ads on other platforms such as Amazon. Amazon’s advertising revenue has compounded 60% over the last five years.

5) Fiver will benefit from remote work and outsourcing trends

Lastly, Fiverr makes it easy for companies to outsource work globally which allows companies to benefit from lower rates and reduced fixed costs. Here’s how Fiverr describes the company’s appeal to buyers and freelancers:

Talent is global and so is the demand for it. By creating a global marketplace we’ve made ourselves more inclusive, equal and diverse. We’ve leveled the playing field and made it possible for every freelancer to have a chance, regardless of their life circumstances or where they choose to live.

Micha Kaufman, Fiverr CEO

Management

Fiverr is led by management who has skin in the game and a track record in delighting customers. CEO and founder, Micha Kaufman who is currently 51 owns 7.7% of the company with his shares worth USD391 million so his interests will be aligned with shareholders.  Fiverr’s management has executed well with the company’s consistently developing new product features while providing users and sellers with a great user experience. Fiverr’s Net Promoter Score (NPS) for buyers and sellers was 66 and 73 respectively as of end-March 2020. For comparison, traditional staffing firms have an average NPS score of just 4 while Upwork’s NPS score was 60.

Valuation/conclusion

Fiverr is trading at nosebleed valuations with a 38x EV/LTM sales multiple so any growth problems will be painful for the share price. However, I think it’s worth paying up for the company’s stellar growth prospects. Fiverr is guiding for 68% revenue growth for the full year of 2020 and I think the company is being conservative given its new products and this once-in-a-generation shift towards e-commerce. Based on my USD158 purchase price, Fiverr could be worth 5x my purchase price in if the company continues compounding revenue at 40-50% over the next 10 years resulting in 30% free cash flow margins.

With Fiverr benefiting from strong tailwinds and network effects, revenue should continue growing at a 40-50% CAGR over the next 10 years which should lead to 30% free cash flow margins which could result in Fiverr becoming a 5-bagger from today’s USD158 share price. I used a 2% terminal growth rate and 8% cost of capital in my DCF valuation. For perspective, platforms such as Etsy which have reached critical mass have 30% free cash flow margins. Fiverr’s gross margins are much higher at ~80% compared to Etsy’s 65% gross margins so a 30% free cash flow margin should be achievable with scale. Key risks would include intensifying competition but Fiverr’s superior user experience and its growing network are strong moats against competitors or new entrants.