Fiverr (NYSE: FVRR) is Just Getting Started

In April 2020, the unemployment rate peaked at nearly 15%. At last count, it still stands at 6.7%, nearly double February 2020 levels. At the same time, thousands of companies have instituted work-at-home policies.

A lot of people – whether they lost their job or miss going to the office – have suffered. But Fiverr NYSE: FVRR, an online marketplace for freelance services, has been an unmistakable winner. The Israeli company’s stock more than 8x’ed in 2020.

Why did Fiverr do so well in 2020?

Fiverr’s 2020 success can be attributed to the advantages of freelance arrangements – for both employers and employees.

Employers can hire specialists to tackle projects that aren’t frequent enough or substantial enough to necessitate a full-time employee. They don’t have to pony up for health insurance or make any long-term commitments – particularly important in an uncertain economy.

Employees, on the other hand, can service several clients as freelancers. That income diversification lowers the risk that they will struggle during a slowdown. They don’t get employer-provided health insurance and a (perceived) steady paycheck, but it’s easier for them to specialize, which can lead to higher hourly rates.

Growth Story is in the Early Innings

Fiverr released its Q3 2020 earnings in late October and there was a lot to like:

• Q3 Revenue up 88% yoy to $52.3 million.
• Q3 Active buyers up 37% yoy to 3.1 million.
• Q3 Adjusted EBITDA of positive $4.2 million vs. a loss of $4.4 million in Q3 2019.
• Full-year 2020 revenue expected to jump 74-75% yoy to $186-187 million.

On that last point, Fiverr had projected revenue to grow 66-68% yoy for full-year 2020 at the time of its Q2 release, so expectations are improving.

The revenue growth rate is outstanding, but shares are trading at 27x forward sales and over 300x forward earnings.

Can Fiverr Justify Its Valuation?

The valuation looks lofty at first glance, but when you consider Fiverr’s market cap and the size of the opportunity in its industry, it starts to look very reasonable – maybe even a bargain.

Fiverr’s market cap is a shade under $7 billion. According to MasterCard NYSE: MA, the projected gross volume of the gig economy was just under $300 billion in 2020 and is expected to come in at more than $450 billion by 2023.

A couple of things:

1. That’s gross volume. A freelancing platform’s revenue is a percentage of its gross volume; in Fiverr’s case, its “take rate” is 27%. And then, who knows what Fiverr’s operating margin will be once the company matures.
2. There are other freelancing platforms, including Upwork NASDAQ: UPWK, that are handling a percentage of these transactions. Not to mention all of the freelance arrangements that are handled between a company and an individual with no intermediary.

Though you shouldn’t get too excited, its okay to get a little excited. Let’s say Fiverr processes 5% of $450 billion of transactions in 2023. At a take rate of 27%, that would equate to revenue of just over $6 billion. That might be too high of an estimate (or too low), but it’s within the realm of possibilities. And if it does happen? Fiverr shares would go to the moon.

How Should You Play Fiverr?

Fiverr has massive long-term potential. But a lot of people are seemingly trading the stock based solely on the COVID-19 news cycle. In the two days following the release of the Pfizer NYSE: PFE vaccine news, for example, FVRR shares dipped more than 27%.

The end of the pandemic is certainly not good news for Fiverr. But the long-term shifts towards remote work and freelancing are already in place. The pace of those changes might slow a bit post-pandemic, but we’re just talking about a delay of the inevitable.

As a savvy investor, you could use the short-term FVRR volatility to your advantage. The next time there is news that indicates the pandemic is almost over – it could be news that the vaccine is getting rolled out quickly – Fiverr shares will likely dip. Consider buying that dip.