Chit Chat Stocks - Deep Dive: Fiverr (FVRR)

Episode Date: October 8, 2020

Fiverr is an online marketplace designed for freelancers. Ryan Henderson and Brett Schafer are joined again by Ian Gray for this week's Deep Dive into Fiverr. Although the stock has grown in value, your hosts have their concerns. However, these concerns have been swept away by Fiverr's performance. Listen closely as Ryan goes over operations (1:45), Brett dives into the market as a whole (4:05) and Ian covers the management team (5:55). As always enjoy the show! Follow Ian and check out his work on Twitter: https://twitter.com/IanGrayLive Follow Chit Chat Money on Twitter: https://twitter.com/chitchatmoney Subscribe to Chit Chat Money on Youtube: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ --- Support this podcast: https://anchor.fm/chit-chat-money/support Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

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Restrictions apply. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are not financial advisors. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or a recommendation.

Now, please enjoy this episode. all right we are live and rolling for the thursday deep dive i'm here as always well my name is brett schaefer and i'm here as always with ian gray and ryan henderson ian is remote he is on zoom so how's it down the southwest are you you're in classes at lmu now right but you're still in phoenix how's that that's exactly right staying busy with uh lots of fun classes this semester and trying to watch my fair share of sports too we're in a sports heaven right now between college football pro football playoffs and multiple sports going on good golf tournaments tennis tournaments you know evaluation premium yeah i think covid is

starting to become almost an asset if you get covid early as an athlete that means you're for sure in for the rest of the season so maybe we're gonna see that we saw it with cam new that's true that's true i think that could be like a huge asset moving forward yeah i'll have of the valuations on fantasy teams are going to move accordingly we'll see if the markets efficiently uh but we're not talking sports uh we're talking fiverr i'm gonna get that right i'll probably get it right at least once it's fiverr it's an online services company ryan's going to talk about what they do and the history and then we're going to get to the rest of the company and everything that goes with it yeah fiverr is an online marketplace for freelance

services so the goal of the company is essentially to streamline the process of hiring or getting hired as a freelancer. So you can view the site basically in one of two ways, as a freelancer or as a buyer. So if I were an independent developer or coder, I can go to Fiverr, I post my qualifications and a buyer will come in and essentially buy my services from me. So the buyer is the seller is the one that's posting their services. It sounds a little contradictory, but then the buyer comes in. It's like you're shopping in the store and then on all the racks, you have basically a bunch of freelance different freelance services so that's basically what you have um there is example if you need someone to build your website i as a buyer would go on to fiverr find someone that

meets the needs so let's say i was on wordpress i could go in there that's someone that's like a wordpress developer or something like that be like all right i like what he's doing i'll pay you to do it it's and then once you pay them fiverr takes their cut so it's a pretty simple business model It's really, they're really generating revenue in one way. I guess there's actually a second way, but we'll talk about that later in the show. History though, Fiverr was started by Mika Kaufman and Shea Winninger. Yes. Did I get that right?

I think so. They're from, well, I don't know if they're from Israel, but they're based in Israel. So I think they might be Middle Eastern names a bit there. Okay. And they were launched in 2010. So by 2012, Fiverr was hosting over 1.3 million gigs and a gig is essentially just a job. like you've done a service. And in the first year they received a $1 million angel investment. Kudos to that guy. And since then they have received funding from Excel and Bessemer Venture

Partners. Interesting note in 2015, Amazon took legal action against a bunch of Fiverr sellers stating that the sellers were writing fake reviews on Amazon. Really? So maybe it's like I came in with some Amazon product and I was like, all right, I need you to go to my competitor's product and just write a bunch of fake reviews is that what fiber that was just driving fiverr's top line maybe i'm not i'm not exactly sure but uh i wouldn't want to go up against legally against amazon i think we have a thousand lawyers on yeah and they uh ipo'd in 2019 since then i believe the stock's done really well um and then uh brett you want to hit on the industry yeah industry and competition so according to their 20f which is basically their 10k since they're a international

company they do traditional outsourcing companies will be their competition and then another type of company that would be online which is Upwork and TaskRabbit those are the two larger ones Upwork is significantly larger than Fiverr but they're growing less quickly they're both growing they have a nice tailwind right now but yeah basically anyone that provides freelance services or specialized businesses that do developing work that make you know graphic design things like that they're competing with fiverr but in a different manner um like i mentioned upwork is the largest competitor and has over doubled the revenue that fiverr has currently but weirdly fiverr trades at a way higher valuation just because of the sales multiple um apparently this makes so i guess

fiverr is more for smaller stuff and that's kind of what they found their niche you know fiverr in the name it's only for five bucks and upwork is more for large organizations although they are cross-competing now the industry is booming uh there's 57 million freelancers in the united states and it seems like 2020 was kind of a perfect cocktail where you had a bunch of people getting laid off and the fact that a lot of people had to conduct their business online that's just a great tailwind uh for anyone that's doing this stuff fiverr especially you know 70 of these freelancers are working on two or more projects at one time so you can do it all through Fiverr. And yeah, I mean, that's it. Is Upwork public? Upwork is public. We actually

went over them. One of our first companies ever we went over, they haven't done as well as Fiverr and the growth perspective actually didn't like the site that much, but that's just on a personal perspective. Okay. Ian, what about you? Yeah. Yeah. I'd have to agree with you on the site there, Brett. It wasn't that impressive on Upwork, but so yeah, like Ryan mentioned, the ceo and co-founder was mika kaufman he's still the ceo he's taking the company public and expect him to be the ceo for years to come um one of the interesting things from kind of reviewing some of what he said and what um kind of some of the shareholder letters and interviews is he says the primary competitor is the offline market he's not too worried about um places like upwork and

task rabbit he thinks there's plenty of market share to go around and really it's about converting people who are doing you know he estimates and this was before covid but that 95 ish of freelance work was done offline and he's like we can just attack that market try and bring in some of that 95 we don't worry if the other people are also getting some of that market um he also one interesting kind of note is that there were some questions around the ipo whether fiverr would would eventually become entangled in the same types of developments that um the same types of legal battles that uber and lyft have become involved with surrounding this idea of freelancers versus employees and he's trying to make it clear that people on um fiverr

really aren't employees that it's clearly a freelance because they're setting their own rate they're setting their own times all that type of stuff um even even less employee like than some of the uber and lyft um freelancers and they're not so they're not pretend freelancers they actually are freelancers. They actually are freelancers. Yeah, exactly. And they're also self-proclaimed freelancers. Like they come there as a freelance developer or whatever. Like, so it's not like it's the company that's calling them freelancers. Like they're doing it themselves. Right. And another big piece of that is that they let them set their own prices. Like with Uber, Uber drivers, they're subject to whatever the surge pricing is. They don't get to choose their

own prices freelancers they get to say what they want to do and when they want to do it and at what price they want to do it so it really does seem like uh fiverr fiverr is really about freelancers and it's really just a platform um some of their initiatives that they've highlighted in their investor to letters are bringing new buyers onto the platform going up market with some fiverr business like you were mentioning brett and is that the competition with upward correct that's correct they would they would like to it's kind of interesting we may dive into this later but they they're building out a platform they just launched it in september where they um kind of allow companies to create portals on fiverr that allow them like let's say you know the three

of us were you know running a business where we needed a um we needed a new logo all three of us could set our budget on our fiverr business platform and then we could have discussions and pick out artists and make purchases from those artists on the platform without having to go through other environments and other systems in our own business. And so it tries to kind of take that whole process and bring it on to Fiverr business and kind of lets businesses really choose the freelance work they need through Fiverr. They're also looking to expand their gig catalog, innovate their technology and services, and expand their geographic footprint. On the ownership side of it, they have about 20% insider ownership. About half of that is from a member of the board of directors who is named Jonathan Kolber, who is an Israeli investor in a lot of tech startups. About 5% is from the CEO. And the large proportion of shareholders are actually from earlier investments, like Ryan was mentioning.

there's also an investment from cubit investments so there's there's um a lot of kind of private equity growth capital venture capital in this business that still remains in this business you have some thoughts on valuation brett yeah i'll get to the valuation keep it quick uh since they're highly unprofitable there's not much to go off here but they have an enterprise value of about 5.3 billion dollars ticker is fvrr and the stock price as of recording was about $158.01. EV to sales is, as everyone may be disappointed, 38. It's high.

And their margin adjusted EV to sales, which is the internal number we like to do for unprofitable companies, is 58, which isn't terrible, but you got to look at that sales and marketing spend. We'll get to that later, I bet. And Ryan will probably get to that next. So 58 on that, that just means that we take the enterprise value and then divide the gross profit or sorry gross margin and then also divide the latest sales growth so as you can see you know they're growing fast um but again they're not profitable yet yeah they yeah they're like break

even so even i think they had it was uh 5.2 million in operating cash flow for the quarter positive 5.2 million but if you put a multiple on that it'd sound terrible like it would set like oh you have a million times priced operating cash flow like it's not the way to evaluate them it's essentially breakeven so um in the second quarter fiverr had 47.1 million in revenue up 82 percent year over year they have 83.1 percent gross margins they had a 0.1 million dollar net loss so they're basically breakeven like we said 5.2 million in operating cash flow for the quarter versus last year of negative 3.4 million in operating cashflow. Active buyers on Fiverr for the quarter was 2.8 million. That was up 28% year over year. And the spend per buyer was $184.

That's up 18% year over year. Like I said, spend per buyer of $184. Think about that. That's a small amount. That's basically your, is that like the freelance equivalent of ARPU? Yes, definitely. And so you're thinking about that. If you're building out a business and you're only spending $180, these are not the big accounts. These aren't huge businesses. They're probably startups or bloggers or people that want a logo. Like Ian said, it's the smaller businesses. They said they had a cumulative 27% take rate. Last year it was 26%. That is surprising to me that more people are coming to Fiverr and their take rate is still going up. Like 27% is really high. So there must be a really compelling value prop on both sides of the marketplace. Sales and marketing as a percentage of revenue was 47% versus 57% a year ago. So they, I mean,

they were boosted in large part due to COVID, but the quarter looked good. And if this is more of a acceleration of the inevitable as opposed to a temporary shift, there's a lot of positive signs for the future. Yeah, that all sounds great. I'm going to dive into the balance sheet and liquidity. As I like it, at least the balance sheet was fairly boring. They've got $170 million in cash and marketable securities. They recently had a secondary offering of about $120 million, which boosted their cash balance. No significant debt, current ratio of about 2.48, which is due to a large cash position. If you take out the cash, it gives it a current ratio of about 0.75. And so assuming that they're going to use that cash to invest in the business,

potentially buy other businesses, things of that nature, their current ratio is pretty good. um like we've been talking about they're operating cash flow positive and free cash flow positive so we shouldn't i wouldn't expect that they're going to have to raise significant funds unless they're doing some sort of um you know significant significant expansion or acquisitions that they just want some extra cash on the balance sheet for and and if they i would not be opposed if i were a shareholder to them really just throwing a whole bunch of capital at it and trying to ride this COVID tailwind and market themselves, especially because so many people are coming to the marketplace now, that would not be a problem for me. And especially if they

can constantly raise at the current valuation, that would not be an issue for me. So I wouldn't even, I really wouldn't even expect cashflow positive numbers for the next year, even if they're doing really, really well, because I'm sure they're going to be like, let's ramp up spending. Yeah. They got to take advantage of that share price. I mean, a lot of companies don't do that and they kind of just disregarded like oh we got a high valuation whatever i mean no you can use it as a currency and make some acquisitions or do another share offering which does dilute shareholders but i mean it's in the long run long-term best interest for that business you

all right welcome back we're going to hit the second half of the show here go further into the analysis here first up is competitive advantages uh i'll start with ian what do think? Does Fiverr have any competitive advantages? One competitive advantage that we can have an argument about is data. With all the transactions they're doing, arguably they have the most experience and data on what it means to have a service as a product, as I've talked about, and what it means to exchange these freelance gigs, what drives them, all that type of stuff. It's also probably not sustainable

unless they continue to grow at the pace they're at. The advantage, other people, other companies, other people will learn how to do this. It's not gonna be a long lasting sustainable advantage. There's a lot of interesting insights out there about whether data can be a sustainable advantage. i'd check out um there's a harvard business review article if you want to learn a little bit more about it but what do you guys think about data do you ever consider that a competitive

advantage uh more access to to more data is always good but i mean maybe not all the time i guess you can bog it down but are they running like way more transactions than upwork i mean is that really a huge advantage versus some of their competitors i would say that it's not i don't know they may have an advantage where they can see where the puck's going and they can say like all right there's a lot of demand here we can build products here stuff like that they're seeing what how people are using their platform and um people can't see that from the outside but from a just strictly all right we got a lot of data it's gonna help us uh i don't know what i'm gonna do and it's not like upwork isn't getting the same type of data you know what

Yeah, the only argument would be that just the way that Fiverr is focusing on those smaller transactions and focusing on the service as a product, that's a thing they talk about a lot, that they help people design their services as a product, that they might be learning more about. They have more microtransactions than Upwork does, where, like you said, Upwork's a little more job-based. Again, not a very strong advantage if it is one. yeah i and i i think so i'll move into my competitive advantage which i i do think they

have little to no moat but i i guess because the business model they run buyers get more sort of trust and oversight into who they work with than you would with like an upwork so it's kind of like it's it's like the stitch fix versus amazon or stitch fix versus going into the store right if you go into the store this is the uh this is fiber would be going into the store you can go you can look at what you want and you can pick stitch fix you're going to get you're going to put a job up this is the up work you're going to put a job up and you're going to get a whole bunch of offers it's going to be closed shipped to you it's basically what i don't know i would prefer the fiber model where as a buyer you get to go in there and hand pick who you want yeah i

think it works better for the freelance work because you know what you want you can't you don't want to have just a bunch of inbounds. You just want to pick one person and make it easily searchable. And that's what they say is that they want to reduce all the friction within that transaction. What about you? Any competitive advantages? Yeah. I mean, I think that two-sided marketplace may work here. So that's another way to talk about network effects with digital businesses. So the more supply they have, the more of the demand they're going to get. And then those work in tandem where people know that they're going to be able to have, they're going to be able to find freelancers on fiber and then freelancers know they're going to be able to

get work if they're on the fiber platform i think that is a slight advantage but it's not as strong as a classic one like i don't know i mean spotify always comes to mind with that one yeah um future growth opportunities who we're going to choose first ryan okay yeah i'll go first i i think this is a chance to ramp up their marketing and i i think they can take a spin on it like how brands market through influencers and i know that sounds cliche but they are really targeting startups and they're targeting a lot of the people that maybe they got big on instagram or youtube and now they're building a website or they're building some sort of brand or merchandise around them and they want a logo they can if they can partner with influencers on instagram or youtube and they

can be like fiverr that's how i got all my work done that's how a bunch of i was able to build my business, that kind of thing. I think they can really accelerate the volume of transactions that goes on on the platform. Yeah. It seems like they've been able to do that at least this summer. Maybe it's just the COVID tailwind, but that revenue growth, they did spend what, like over 50% of their revenue on marketing in the prior year, but that did contribute to the 80% growth this year. The other one that I didn't see that was that neither one of you have written down here was uh promoted promoting your services as a seller i mean that would that would make sense that's another way to generate revenue for them is sellers really want work they can promote their

services and pay to do so yeah ian you've researched this more do you think fiverr has an opportunity to do promoted listings they kind of have an advertising based business model on there they i think they do have that yeah they have they have started it um and they were just i was just reading their most recent shareholder letter and they're excited about it they've reworked it a little bit to make it more attractive to the sellers and sellers seem to really be enjoying it. And it's an obvious, it's an obvious play for them because they're just trying to connect people who, you know, the best sellers with the best buyers. And so it's really a, an obvious place for them to go. Okay. All right. And what's your future growth

opportunity? Yeah. So my future growth opportunity is expanding the geographic footprint. And that's something that they've talked about a little bit and they've started to do. The idea behind it is connecting sellers around the world is just better for everybody because if you can get a graphic designer from anywhere in the world there's the chances of finding someone who's better are just greater right your talent pool is larger um and you know it's this globalized economy that we're living in so the more they can do that the better um the better the marketplace becomes the stickier it becomes all those types of things the problem is that they've started to encounter is the language barrier. And so they've started to try out a few new language specific sites,

specifically in German, Spanish, French. They also launched sites in the Netherlands and Italy that are focused on those countries. And so instead of just having one Fiverr site for the entire world, they're trying to specialize a little bit while still maintaining that global talent pool. Right. That is a big issue is the language barrier because you have to communicate Yeah, I guess they'll have to solve that somehow. It's going to take a little bit of investment. What's your future growth opportunity? Mine's one we've already discussed, but slowly eating Upwork's business.

They make a lot of inferences to this on the SEC filings. They talk about it on the conference calls. I think they have a quote here, you know, their path to upmarket. They say that they need supply and demand in the marketplace, blah, blah, blah, all that stuff. Yeah, I mean, if you read the conference calls, you know they talk about this a ton. And I think a good number to look at for that is their ARP. number which is whatever the average price or not price average dollar spent per buyer if that slowly increases which it has i think it was down to like 100 bucks in 2013 or like six seven years

ago and now it's up to what 180 which is good and i think there's a ton of room to run there if you think about how much money people are actually spending um if they get those larger businesses that are spending a few thousand bucks i mean that could you know continually grow and contribute a lot to the revenue growth all right um yeah and they did mention that 55 i don't know if you just said this but 55 of their revenue i believe comes from the accounts that are spending more than 500 dollars right that's good that's good um all right highlights and lowlights what do you have uh yeah i'll go first uh i like their cohort number growth they seem sustainable stuff there and it's kind of just accelerating you know those charts with all the different colors and then the

you know what ones are growing faster and stuff everyone has that in their s1s and 10ks i think they have impressive arpu growth which again is just the different they have a different metric name for that i think they do have a massive tailwind that should occur over the next few years here maybe it'll decelerate a little bit um because it was just kind of the perfect storm this summer uh but i still think it's going to be good low lights though i see no real competitive advantage out of them being uh you know decent two-sided marketplace maybe having some network effects and then their spending on sales and marketing is a concern if because that means that you have to think they're going to be able to grow revenue you know at a higher rate than that

in the future and it's just it's a high amount of spend um and you're kind of pricing all right they got to keep up the sales growth for the next few years here it did come down pretty fast though and i think that is a testament sometimes you see like these really massive boosts we saw this with covid you see a really quick boost and all of a sudden they're more profitable i think they said they were uh cash flow positive two years earlier than they were expecting to be so it's like that is a good problem to have like oh shit we're really profitable like this is a good business at scale and so i think they can have tremendous operating margins at scale i like the rating system as well so that allows buyers to filter out the type of quality they're getting and it

incentives it incentivizes better work on the seller's side as well kind of like the whole amazon seller type thing um low lights for me though the i think the world's moving to like a no code like no code businesses you know like shopify like more and more people and even people are building businesses on youtube or wordpress requires no code essentially i think a lot of stuff's moving that and yeah you need the occasional upkeep from developers on your sites but the more you can do to alleviate having to develop at all it just it feels like that's a major tailwind that's or major headwind for uh fiber yeah i think that's gonna happen really slowly though there's not gonna be zero freelance jobs overnight um there's not gonna be no right

work overnight you know computers aren't gonna be able to do everything for whatever people want to do especially in things that are creative so i'd count with that think for me yeah like developers are always going to exist but you either are going to have these startup businesses that are able to do everything through no code or you're going to have bigger businesses that are just going to be hiring developers and having them build it in-house. It feels like they're going both ways and that's basically parting away from Fiverr on both sides. Maybe. I guess I haven't really thought about it. Ian, do you have any? Yeah, I was just going to say, I think that's part of the reason that they're going after this Fiverr business idea is they really have to move

upstream and capture that business spend and make it make sense for businesses instead of hiring those developer teams to say, yeah, we'll set our Fiverr budget at $10,000 a month and we'll just hire our developers through there. If they can do that, then I think they've got a good business here. If not, it's going to be a bit of a struggle. A few of my highlights are, I think the product just makes sense, at least as it currently is. It saves people time. They can find sellers real fast for, like we said, if you just need a logo real quick, you can find someone on Fiverr for 20, 30, 40 bucks and get your logo made. It also has this interesting flywheel effect that the more quality demand there is, the more quality supply there will be, which then means

that there'll be more quality demand because if there's more, there are more good sellers on the platform, there's going to be more buyers who want it, which then is going to cause more sellers to join the platform. So if they can continue growing both their sellers and their buyers, it's going to be a great business. The big thing I'm worried about in my lowlights is it's a classic kind of Jeff Bezos, your margin is my opportunity situation. Like you were mentioning, they're taking about 27% of the transactions. And so it seems like a big margin to me. I used to sell some things on eBay when I was in high school. And at the most, it was 10% to 15% take rate for basically something that's the eBay of services. So at a 27% take rate, I just have to imagine

that between the competition is more and more people move online instead of offline. It's just going to drive that margin down for Fiverr. And that's something they're going to have to scale fast to make sure that that margin compression doesn't hurt them too bad. Yeah. I mean, there's going to be margin pressure. I mean, well, I think that's a, it's a likely risk that that can happen. You just mortgaging your relationship with the stakeholders or the users on your platform at a 27 percent take rate like you're just it's a higher risk yeah you're just way you're essentially saying like go find something better like because if you unless you start to drop that down and the other part was they were bragging about it on their conference

call that they were able to bring their take rate up i'm like the the good thing would be if the take rate is coming down and your profits are still increasing that's kind of tough to do i mean i don't mind them bragging to investors that that's happening but the thing is you have to provide if your take rate is going to be high like this you have to provide enough value and who knows if they are you know right you're just asking for someone you're just asking for someone to try and go around it you know just vinmo me on the side right let's not use let's not use upwork find my upwork profile and vinmo me on the side right yeah same thing could happen with a fiver all right last question before we wrap up we do this every time are we more interested or less

interested in Fiverr after today? Who wants to go first? Ian? Yeah, sure. I'll start. It's hard for me to say I'm ever less interested in a business, especially as long as it doesn't have any major red flags. I think for me, I'm definitely more interested. It's got an impressive take rate like we've been talking about and some impressive growth with the COVID tailwind. So I'm more interested. Okay. I honestly hadn't heard of Fiverr until Ian said, let's do this as a show. So, um, I guess I'm more interested because it's the first time looking at it, but as far as the business goes, anytime that I have low conviction or any concerns at all, and the multiple, the sales multiple is in the high thirties.

I, it's like an easy write-off for me because it's a struggle, even if I have ultimately high conviction and it's a high multiple. So I'm just, it's, it's a no-go for me. yeah i mean this one i'm interested i guess it puts it's going to be on the watch list maybe maybe one of those fringe ones when you know you just check the price every once in a while but i mean i'd get interested in this thing was trading at like a sales multiple of 10 and maybe the growth is going to be there and they will get to the sales multiple of 10 eventually but i really think with their marketing spend and the take rate pressure that their future

operating margins and cash flow margins aren't going to be as strong as people may be pricing in and an EVA sales of, I mean, 38 is a lot. So yeah. All right. We good? Yep. That's going to do it. Thank you guys for listening.

As always, remember, we are not financial advisors. Anything we say on this show is not formal advice or recommendation. You can find Ian on Twitter at iangreylive, correct? That's right. You can contact us at chitchatmoneypodcast.gmail.com for any show suggestions. You can subscribe on YouTube.

and you can subscribe on spotify and you can also go on to yeah you can see ian's new background i think he's going to do like a new background every show that's great subscribe to the youtube specifically for that all right that's going to do it thank you guys for listening we'll see you next week Thank you. Thank you.