As Deep Knowledge Investing has grown its individual subscribers, we’ve done more on the topic of investor education. I thought it would be interesting for you to find out about an investment we didn’t make and why.
In late 2021/early 2022, I took a look at Fiverr ($FVRR). The company is an online marketplace for digital services. If you need someone to design a logo for you, sing you a song, be a virtual personal assistant, do video editing, or perform data entry, Fiverr is a great place to find someone to do it for you at a good price. I believe that the work from home, work from anywhere, digital nomad trend will be with us for a long time, and Fiverr is a great play on that shift. In addition, at the time, a lot of offices were insisting that taking a Covid shot was a requirement to remain employed. For the people who didn’t want to take the shot, and who had a skill set that didn’t require them to be in an office, offering their services on Fiverr was an appealing option.
$FVRR revenue grew 45% in 2018, 42% in 2019, 77% in 2020, and 57% in 2021. From 2018 to 2021, active buyers grew from 2.0MM to 4.2MM (up 110%), spend per buyer grew from $145 to $242 (up 67%), and take rate grew from 25.7% to 29.2%. Take rate is how much of the end user revenue the Fiverr platform keeps. With that kind of growth, you can see why I was interested in the company.
Fortunately, DKI Board member, and my co-portfolio manager from Silver Arrow, Raji Khabbaz, talked me out of the idea. He pointed out that high-multiple, long-duration, technology-based stocks were going to get killed by Federal Reserve rate hikes. Raji was right and the stock fell from around $100 at the time we looked at it down to $21. $FVRR has traded back up $26, and with the Fed likely pivoting to lower rates later this year, I thought it made sense to take another look.
Two years later, the number of active buyers has been stuck at 4.2MM. Spend per buyer has risen from $242 to $271. That’s growth of 12% over two years, partly or entirely helped by inflation. The last reported quarter was 3Q ’23. Revenue in that quarter was up 24% from two years earlier. So, with no user growth and 12% more revenue per user, how do we get to 24% revenue growth? That’s because the take rate has increased from 28.4% in 3Q ’21 to 31.3% last quarter.
Here’s the problem: While maximizing platform profits is an important part of the job for Fiverr, it’s a limited way to gain revenue growth. It’s clear that Fiverr can grab the incremental 1% or so from its vendors and be fine. However, at some level, either Fiverr’s vendors leave for other platforms, or they increase pricing to ensure they continue making the same amount of money. When they do that, the Fiverr platform ends up with no user growth or negative user growth. With no user growth and only 12% spend per buyer growth over two years, it’s reasonable to assume that Fiverr is at close to the maximum it can take out of the system and not start losing business.
Analysts expect revenue growth of 13% next year, and I’m a bit skeptical of that. 2024 estimated earnings per share are $2.19 meaning the company is trading at 12x earnings which is cheap in this market. Still, with top line growth slowing and user growth completely stalled, the stock should be trading cheaply. I’m staying on the sidelines for now.
I like Fiverr’s platform and business model, and have used it myself. I think what it would take for me to want to own the stock would be an improvement in top line growth that isn’t immediately matched by the stock price. This was a good one to miss, but it will be worthwhile to check in on occasion in the future.
IR@DeepKnowledgeInvesting.com if you have any questions.
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