Fiverr is an Israeli online marketplace which connects
freelancers with buyers. It was founded in 2010 by Micha Kaufman who is also
the current CEO and claimed to have started the concept of Service as a Product
by offering digital services in exchange for a small fee. The popular service
that was offered during its earlier days was Logo design for $5 and hence its
name, Fiverr. The platform began to grow as more services are being offered, bringing
freelancers from offline to online and digitizing their services.

For instance, if a buyer wishes to source for a gig worker
to design his website, he can pick the ideal freelancer by reading reviews, pricing, asking a few questions. If the end-product is not
satisfactory, the online gig could either raise a dispute or cancel the order
and funds will be reimbursed to the buyer’s account.

Back then, I was a customer of Fiverr before I invested in
this stock. I first got to know this company when I was looking for a
freelancer to optimize my LinkedIn profile and I must admit that I was spoilt
for choice when I was scrolling through the list of freelancers.

The experience was smooth and since then I have been regularly
using Fiverr. Also, I need not worry about freelancers failing to deliver the finished product or go missing as it is in the interest of the freelancers to make us feel
satisfied with the product so that they can receive positive reviews.

When I came to know this stock late last year, it has
already gone up 10X since its listing. In fact, you will be surprised that it
outperformed Tesla in term of 1 year return. Yet the 10X return make sense as
Covid-19 pandemic has increased motivation for business owners to work with
freelancers and working from home has encouraged full time workers to try out
freelancing. And Fiverr is one of the best platforms to start with, as it matches
the freelancer with the right buyers without the need to spend on marketing or
upfront meeting costs.

And the numbers in 3Q 2020 proved to be true with strong
revenue growth and smashing analyst expectations.

Despite going up 10x since it’s IPO price of $21, I believe
it has much more room to grow and I got in at average price of $ 241.

Here are a few reasons which I believe that the best for
Fiverr is yet to come!

1. Moving further upmarket

Fiverr Pro

Fiverr derives its Revenue using the formula: Active Buyer X Spend Per Buyer X Take rate. And
moving upmarket is to increase the spend per buyer and hence Fiverr pro was
introduced back in 2017. What sets the Pros apart from other freelancers is former
experience in working in big and influential brands and having unique field of
specialization. Generally, they attract big companies which require high end
professional work as well as working on milestone. For instance, a movie
production involves script writing, shooting each scene and video editing. Hence
with Fiverr Pro, global brands can hire a specific pro which specialize in each
milestone. If the Pro fails to meet the required standards, they can easily replace
with another Pro to complete the project without spending money on hiring costs
and dealing with regulatory compliance by hiring and firing.

Fiverr Business

Fiverr for Business was launched in the middle of the
pandemic to define the future of work. It is tailor made for business teams collaborating
on a project and needing to hire a freelancer. For instance, a group of
employees developing a new advertisement can head over to Fiverr Business
Platform to source for the right gigs and have a group chat functionality or
setting up a Zoom call to discuss on the progress. Imagine having tight
deadlines and having to submit your project the next morning. With Fiverr
Business, the team can outsource the job to freelancer in US and brief the
seller on the requirements and get the completed work the next morning.

Fiverr is offering first year free to capture the market
share but will be chargeable at $149 for annual subscription. With Fiverr
Business, HR need not screen through resumes and or conducting job interviews
to hire a part time staff to complete a project. All it takes is $149 and
Fiverr does the handpicking of the best talent who has what it takes to cater
to business audience and certain level of professionalism in the way they communicate
and getting work done.

2. International Expansion

Olá: Fiverr Announces a Portuguese-First Website for Buyers and Sellers in Brazil

In the past few years, Fiverr has successfully expanded into
European markets and recently announced their expansion in geographic footprint
to Latin America countries. While Fiverr is already globally accessible,
international expansion means offering the possibility accepting local currency via local payment
methods and presenting in their own native language which in turn
increase take up rate and a better platform experience. For instance, to
capture the market in Brazil, Fiverr has successfully launched its service in
Potuguese (native language of Brazil) and start accepting Boleto and Reis (payment
method in Brazil). It paid off and Fiverr saw a 137% increase in freelancing
service from Brazil. The same can be said for Mexico, where Fiverr offered a
local language site and allows local payment in cash through partnership with Oxxo,
a leading convenience store chain. With that, Fiverr saw a 100% uptick in
Mexican freelancers joining the platform. 
These shows Fiverr’s ability to scale to capture more market share to
strengthen its ecosystem of freelance service online.

3. Huge Total Addressable Market

There has been a trend towards gig economy and Covid 19 has only
helped to expand exponentially. As retrenchment is prevalent during pandemic
times, gig firms such as Grab Delivery or AirBnB helped to reduce the strain on
unemployment and put food on the table. While the pandemic will eventually disappear, I believe that the world has already embraced this new way of working.
Even those who found their full time job may be open to selling their
services on Fiverr after their work hours, and drivers would embrace hitch to
earn extra income on commuting. Perhaps Covid-19 is all it takes for many to
find out that full time employment may not be their cup of tea after all— it
lacks freedom, flexibility, and ownership. In general, millennials grown up in
a world shaped by technology and start-ups and they are more willing to
tolerate changes and uncertainty in their work. In exchange for job security,
they strive for some ownership in the work they do and the freedom to work
anywhere and anytime they want— by the beach facing the sun with their toes
are squishing on the sand or even in a café overlooking the winter scenery with
falling snowflakes.

You can freelance anywhere with a laptop and internet connection Source: thriveglobal.com

This translates to more companies adapting to this new way
of working and hiring workers. After all, it is more cost efficient than hiring
a full-time employee and they can save on taxes, worker compensations, applying
work permits and pay bonus. They also save on office space to
house hired employees.

One good example which gig economy is disrupting is the
healthcare sector. There has been growing interest in telemedicine, and thanks to
start-ups and app which allows anyone to connect to a physician at the comfort
of their home via video call and medication delivered to their home. I won’t be
surprised if Fiverr will onboard physicians to provide teleconsulting soon.

Teleconsulting on the rise. Photo source: Business Times

As more professions starts to embrace and participate in freelancing
service, I believe Fiverr will be in a position to capture more market share and
in the process to strengthen its moat becoming a central big force in the gig
economy. 

Valuation of Fiverr

I will be using two step discounted free cash flow model to
determine the intrinsic value of Fiverr. 
I will start with forecasting the Q4 earnings and project it’s free cash
flow and then combine with the past three-quarter results to get Full Year
earnings and FCF.  The next step would be
to project the next 10 years financial results and perform the DCF to calculate
its per share value.

Step 1. Determine the net income of Fiverr

I am not being unconservative here considering that
management always under promise and overdeliver the performance. In Q3 guidance, management projected $48-$49mil guidance after raising guidance
yet achieved $52.3mil.

Its gross profit (GAAP and non-GAAP) has increased over the
years which signals the higher potential for profit and I will use the same
gross profit margin (GAAP) of 83.3%. The same margin as Q3 will be used in deriving
the list of operating expenses.

Improving Gross Profit Margin every year

Step 2: Derive Trade Receivable and Trade Payable using an
average of DSO and DPO for the past 6 quarters.

D&A and Share Compensation from Operating Expenses

For D&A and share compensation from Operating Expenses,
management did a breakdown on the Operating expenses due to Depreciation and
share-based compensation (see above). The purpose is to show the GAAP vs Non-GAAP earnings
where non-GAAP does not take D&A and share compensation expenses to determine its EBITDA
margin. To determine D&A and Share compensation to be added back to
cashflow, I take the average of FY 2019 and 3Q 2020 Depreciation and share compensation as a % of the operating expenses.

Step 4. Work out the Cashflow for Q4 2020

Total D&A for Q4 2020= 587 (D&A and Share comp. from Costs of
Revenue i.e. 1.1% of Q4 2020 Revenue) +151+468+59

= USD 1,265,000

Non-GAAP Gross Margin= 84.4%

Gaap Gross Margin= 83.3%

Hence difference in Gross Margin= 1.1% of Revenue which
accounts for share based Compensation

US$53,400,000 *1.1% = US$ 587,400

Although the difference between GAAP and Non-GAAP consists
of Share compensation and D&A, I will lump under D&A for simplicity
sake.

User Funds

This consists of buyer prepayments inclusive of
company’s transaction fees which will be earned when once an order is
completed. User accounts would be funds which is transferred to seller’s
account upon delivery of the project. As the company doesn’t have the ownership
of the funds and they usually cancel off each other since payment is
transferred from buyer to seller eventually, I would not include it in my FCF
calculation.

Capex as a % of Revenue stays at 2% in past years. I will be excluding
business acquisition of ClearVoice, Inc, in Feb 2019 amounted to US$ 9.9mil,
since it is a onetime expense.

Step 5: Projecting future Net profit

Step 8: Calculate the Free Cash Flow

 

Summing up present value = US$3,031 which is 9.5X the
current price, almost a ten bagger. I believe there’s more upside to this stock
compared to Square, since the next 10 years of cashflow adds up to US$219, which
made up of 68% of current share price.

I am getting this blog post up ahead of earnings release in a few hours time and I can’t wait to see what’s in the cards as Fiverr reports Q4 earnings.

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