Fiverr (FVRR) is an online marketplace for freelance work. Founded in 2010, based in Israel, the company is currently priced at $240 (Jan 21 2020), with a Market Cap of $8.44B. The company is at an inflection point in terms of growth and revenue, recording $163M (+80% YoY) in Trailing Twelve Months (TTM) revenue. It is expected to grow at excess of 70% over 2021.
Risks include a rich valuation at 51X Next Twelve Months (NTM) revenue, the tail winds from work from home (due to Covid) trailing off – unlikely in my opinion, and a distraction in management bandwidth as the focus shifts to expansion in categories, new geographies and products.
I am going to accumulate shares in $FVRR over the next few months, expecting it to be a core (top 15) holding for 3-5 years.
What is freelance work?
Essentially, a freelance job is one where a person works for themselves, rather than for a company. While freelancers do take on contract work for companies and organizations, they are ultimately self-employed.
Freelancers are responsible for all sorts of things that traditional employees are not, such as setting their work hours, keeping track of time spent on different projects, billing clients, and paying their own employment and business taxes. Freelancers are not considered “employees” by the companies they work for, but rather “contractors.”
How many people freelance?
More than one-third of the American workforce freelance amid the Covid-19 pandemic, contributing $1.2 trillion to the U.S. economy.
This was a 22% increase since 2019 and it was fueled in part by an influx of younger, highly skilled professionals seeking flexible alternatives to traditional employment. 59 million Americans performed freelance work in 2020.
Why are the number of freelancers growing?
Freelancers like the flexibility of time and hours, the ability to earn an income on the side, and the capability to monetize their skill.
Amid a tough job market for recent college graduates, half of the Gen Z workforce (age 18-22) have freelanced in the past year, and of those, more than a third (36%) started since the onset of Covid-19.
The share of independent professionals who earn a living freelancing full-time has increased 8 percentage points to 36% since 2019. 59% of freelancers have participated in skills training in the last six months vs. 36% of non-freelancers.
There is a burst in demand for people to support customer services as well as ecommerce development, web and mobile design.
75% say they earn the same or more in pay than when they had a traditional employer.
Society’s perception about freelance is also changing. Seventy-one percent of freelancers say perceptions of freelancing as a career are becoming more positive, the survey revealed.
Meanwhile, 67% of full-time freelancers say that freelancing has prepared them to cope with the uncertainty of the coronavirus pandemic better than those in traditional jobs.
What categories of work are being freelanced?
Freelance jobs most in demand today are in computers (Graphic design, Web development) /mathematics (data analysis), and in finance (accounting) /business operations (social media marketing, administration).
Even before Covid-19, 26% of freelancers worked entirely remote and 46% worked remotely more than half the time. Freelancers doing skilled services earn a median rate of $28 an hour.
How big is the market? Who does freelancing?
Freelancing income exceeds $1 trillion, almost 5% of the United States’ GDP.
Every generation had more than 1 in 4 workers who freelanced in the past year. The ascent of freelancing is clear in generational results:
29% of Baby Boomer workers (ages 55+) freelanced,
31% of Gen X workers freelanced (ages 39-54),
40% of Millennial workers (ages 23-38) freelanced and
53% of Gen Z workers (ages 18-22) freelance
What are the market dynamics?
Of the 57 Million freelancers, over 5 million are already finding work purely online via platforms such as Fiverr, Upwork, Freelancer and over 20 other websites. Specialized marketplace such as TopTal (Top talent) for developers and Behance for designers also exist.
Most freelancers find that small & micro business tend to use freelancers more than large business. In this kind of marketplace there are a lot more sellers (supply) and harder for them to find buyers (aggregate demand).
For long services feel into 2 major formats – a) Time and Materials (quoted) or b) Fixed Bid.
In a Time and Materials project the risk is on the buyer to define scope, and the seller gets paid a fixed fee per hour.
In Fixed Bid projects the risk is on the seller to narrow the scope and the seller gets paid a fixed fee for the project.
Since both these formats introduce risk, there is a need to “productize” services. A fixed deliverable at a fixed price.
That was Fiverr’s insight that led them to start the company.
Who is Fiverr?
Fiverr was founded by Micha Kaufman and Shai Wininger in Israel and was launched in February 2010. The founders came up with the concept of a marketplace that would provide a two-sided platform for people to buy and sell a variety of digital services typically offered by freelance contractors.
Services offered on the site include writing, translation, graphic design, video editing and programming. Fiverr’s services start at US$5 and can go up to thousands of dollars with gig extras. Each service offered is called a “gig”.
Freelancers – merchants, entrepreneurs, contractors in more than 200 countries use Fiverr to sell their skills, and talent. They can offer “Gigs”, ranging from web design, logo creation and market research, to personal greetings and video animation. Customers can then buy these jobs for services they need rendered. Fiverr helps sellers collect payments, promote their services, manage orders, exchange files and communicate with buyers.
In an interview with NFX, Shai said the $5 price point was a gimmick.
“It also created a single price point so that we didn’t have to deal with multiple price points based on quality. We knew that over time we were going to extend that, but it was all about simplicity and removing that friction and inefficiency using software. That was it.“Founder of Fiverr
Over the next few years they raised over $150M from blue chip Silicon Valley investors such as Accel and Bessemer Ventures. Fiverr went public in 2019.
Who are the competitors?
The freelance market is very fragmented, diverse and competitive. Over 50 marketplaces exist such as Upwork, Freelancer.com, Insolvo.com, FlexJobs.com, SolidGigs.co, TopTal.com, PeoplePerHour.com and Guru.com.
There are no official market share numbers, but since the market is very large ($1.3 Trillion global), one can safely assume that Fiverr has low market share ($160 Million in 2020 revenue) and the penetration is negligible. That means the opportunity to grow is tremendous.
Fiverr has over 7 million users.
Upwork has over 17 million users.
Freelancer has over 31 million users.
What products does Fiverr offer?
The main Fiverr platform has multiple capabilities.
- A catalog infrastructure to support over 250 categories of services from voice over to logo design.
- A proprietary liquidity management system, putting 9 years of transaction and behavioral data to use, allowing us to match buyers and sellers at the gig level in a personalized fashion.
- A comprehensive set of rating and reputation, scoring, and leveling systems to improve the quality of gigs and sellers on the platform.
- Features and tools to provide value to our buyers and sellers in areas such as payments, communication, collaboration, and automation
Fiverr Studios: Allows freelancers to collaborate and offer combined services for a project
Fiverr Discover: a beautiful destination site showcasing designs sellers made for our buyers through the platform. Customers use this site to look for inspiration for their projects on hand.
Learn: allows freelancers to keep upgrading their skills
ClearVoice: A specialized capability for hiring voice over artists
And.co: An acquisition of a company providing tools and automation capabilities (back office) for freelancers.
Fiverr Logo Maker, bringing the power of artificial intelligence to Fiverr’s best creative talent. Allows graphic designers on the platform to monetize their existing designs, deliver their work faster, and serve more customers.
Fiverr’s Choice: A chosen set of freelancers for each type of gig. This is very useful for high value buyers to narrow their selection.
Promoted listings. They have been testing the product internally for a while, and we are planning to launch the beta version in April 2021. This will be the first time they give sellers a tool to proactively promote themselves on our platform.
How is Fiverr different than competitors? What is their moat?
The most important thing to remember is the insight “Productized Services”.
In this market, buyers find it takes too long (this is from personal experience) to vet suppliers, look at bids, then start the work.
If the work can be broken up into products that can each be purchased as a SKU that makes the purchasing process frictionless.
As opposed to competitors who list “freelancers”, Fiverr changes the game and lists “products” which you can purchase – with a defined outcome. These translate to Gigs for freelancers.
This makes it easy to compare 2 products instead of 2 freelancers who you might not know anything about.
That creates the Fiverr flywheel.
That flywheel results in consistent growth in buyer and seller cohorts.
The revenue stickiness among sellers creates a strong moat.
While sellers sell on multiple platforms, they can scale “faster” on Fiverr over UpWork, where they have to bid for each project.
Here is an example from a seller:
The major difference between popular freelance marketplaces like Upwork and Fiverr is the process of working with clients.
Working with clients on Upwork means constantly pitching for new jobs. So new work doesn’t happen in the background without your input — you have to be proactively on the hunt for new work when you want it.
Fiverr is a completely different story.
With Fiverr, you essentially productize your service via Gigs.
Each Gig describes a specific deliverable you will provide in exchange for a set price, starting with the words, “I will…”
But the best part about Fiverr is that because of the way Gigs are set up, clients are empowered to make purchases without even talking to you.
How does Fiverr make money?
Both sellers (20%) and buyers (5%) pay Fiverr a commission for transacting on the platform.
How do the financials look?
In one word – tremendous. That’s the main reason the stock price is up 900% in 2020. Growth is accelerating, and I dont believe this is going to slow anytime soon.
There are over 3 million active buyers and growing.
The take rate (commissions) have been growing as well.
What about their competitor UpWork? Are they are “better value”?
UpWork is the biggest large competitor to Fiverr, but they are not growing as fast (18% vs 80%).
I attribute this to seller efficiency with Fiverr and that comes from productized services. The more Fiverr helps sellers productize their services into SKU the easier it becomes for buyers to buy quickly. It does create lack of differentiation for sellers, however, who now have to rely on more reviews, ratings – which is a good incentive.
How big can this become?
There are 3 future directions that Fiverr can take, which I believe will take them to over $1B – $10 Billion in revenues.
They become the platform for “all” knowledge work – “LinkedIn with transactions“. You want a designer, you can hire one at Fiverr and see their prior work.
They become the complete automation platform for freelancers, helping them grow into small businesses – “Square ($SQ) for freelancers.
They become the “Amazon for services” providing buyers and sellers the ability to catalog, purchase, deliver and buy services.
What about valuation? Is this not too rich?
At 51X LTM revenue, this is among the richest < $10 Billion market cap company. There are others such as Shopify and Zoom that are richer, but they have Billions in revenue.
I am paying for growth and betting that they can productize more services.
Among marketplace companies, Fiverr (if they execute to their 2021 plan, which they have consistently done in the last 2 years) is the fastest growing.
What does the institutional buying look like?
Institutional buying has been strong and over 200 funds own Fiverr. While that is not “tremendous” it is growing.
What is the one year price target? What about beyond that?
Assuming the 70%+ growth rate this year $FVRR should be at over $275 Million in revenue, which gives it a $14 Billion valuation at current NTM valuation at 50.
I think valuations will contract.
It is hard to predict how much they will contract by, but it can support 30X EV/NTM at which case it will be a $10 Billion Market Cap company or 20% above its current price of $240 or $288 per share by Dec 2021.
Over the next 5 years (2020 – 2025) I can easily see FVRR being at over $1.5 Billion in revenue and growing to over $40 B in Market Cap.
What are the risks?
There are 3 major risks:
- Valuation contraction from currently very rich position. If 50X EV/LTM is high (which it is), I can see this being only 10-20X in a down (bear) market. A reasonable valuation is 25X based on other multiples of fast growing companies, but that means a 50% haircut from current stock price.
- Fiverr saw tremendous growth during Covid. I am not sure that was supply led since more people worked from home, but demand had to be there for transaction liquidity. I worry that post Covid the buyers will go back to using previous (local) providers instead of online. 90% of the current freelance market is offline.
- As Fiverr tries to expand into new categories and markets there is a chance of dilution of the management team bandwidth. This is the #1 cause of issues for most growing companies in my opinion. They tend to bite off more than they can chew.
- In 2015 Fiverr settled a lawsuit where Amazon complained it helped sellers on Amazon marketplace get fake reviews from various “sellers” on Fiverr. They have since discontinued that service, but that creates an opportunity for freelancers from various places to productize poor quality and inherently bad services.