Motley Fool Hidden Gems Investing - Metaverse, Streaming Ads, and The Biz of Freelancing

Episode Date: May 11, 2022

Is Wall Street starting to take a breath before reacting to earnings reports? (0:20) Tim Beyers discusses: - Roblox shares rising despite (on the surface) a disappointing Q1 report - Developer exchange fees - Why The Trade Desk is a company in transition (15:23) Asit Sharma and Bill Mann take a closer look at Fiverr International, an online marketplace for freelance services. Stocks discussed: RBLX, TTD, FVRR Host: Chris Hill Guests: Tim Beyers, Asit Sharma, Bill Mann Producer: Ricky Mulvey Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

Stop wasting your nights on a mattress that doesn't get you. Experience the most comfortable mattress in the world. The Sleep Number Smart Bed. At the touch of a button, you can personalize your comfort. Choose firmer or softer. Adjust cooler to warmer. And right now, save up to $2,500 during our massive Labor Day event. Hurry into your local Sleep Number store today.

Because we have your number. Chris Hill. If you're a day trader, this probably isn't the show for you. If you're looking to own businesses, welcome. Motley Fool Money starts now. I'm Chris Hill, joined by Motley Fool Senior Analyst, Tim Beyers. Thanks for Thanks for having me. We've got companies in the realm of the entertainment industry on the docket today. We're going to start with Roblox. On the surface, this doesn't look like a great quarter for Roblox, just in terms of what Wall Street was expecting. The loss in the first quarter was bigger than expected, the revenue was

lower than expected, fewer users. Before we get into what's happening with the stock, stood out to you in terms of Roblox results? Really interesting. Bookings decreased 3% to $631.2 million. By the way, can we just admit right upfront, that's a lot of money. I mean, $631.2 million. This is still arguably, Chris, the most successful Metaverse company, and I recognize I'm lumping Meta into that conversation, I still think Roblox is it. And here's why. We are no longer in COVID times. There maybe isn't enough or as much spending on the platform on a year-over-year basis. It's not accelerating to the same level, but the engagement is clearly there. The average daily active users were 54.1 million. That was

an increase of 28% year-over-year. Hours engaged, 11.8 billion with a B. That was up 22% year-over- year. Developer payments were roughly up 24% year-over-year. My message from that, Chris, is people are investing in the platform. The bookings may have been down slightly, but all signs are that age cohorts are spending more time with Roblox. That's what you need more than anything else. With the stock being up, I think there's reason to be hopeful here, Chris. We could talk a little bit more about the economics, but I think overall, I'm very impressed that Roblox is drawing a large audience. It's drawing an audience across multiple cohorts, all the way up to that 17 to 24 age range. That's a good thing. That bodes well for Roblox over a

long period of time. It absolutely does. And in terms of what's happening with the stock, over the past 12 months, it's down about 75%. Yesterday, it hit a 52-week low. And immediately after the results came out, after the closing bell on Tuesday, shares were down after hours 6%, 8%, 10%. As you and I are talking right now in the middle of the trading day on Wednesday, the stock is up about 10%. Granted, it's up 10% off of yesterday's 52-week low. But I do wonder, not if we're at the bottom, because I'm not smart enough to call the bottom of the NASDAQ, But I do wonder if we are starting to enter this territory where, look, there's always going to be in this environment, there has been all calendar year, and there will continue

to be sort of rampant selling of shares of companies without as much consideration as maybe there do. When I look at what's happening with Roblox, again, the after-hours activity and what's actually happening now. I wonder if we're moving into this period where analysts on Wall Street, people running funds, and individual investors like you and me are maybe taking a little extra time to digest results, because that would help explain what's happening with Roblox, where it's just like, oh, it's this growth company and their results aren't perfect and they're not as good as expected, so therefore, it's selling off. Then you step back a little bit and go, well, wait a

minute. What is the environment we're in? Where is this company going? What direction are they headed in? I think you're absolutely right to reference the metaverse. I fully expect that just like, let's call it 23, 24 years ago, companies were falling all over themselves to talk about how they had a website and they had an internet strategy. I fully anticipate we're going to be going through this over the next 10 to 15 years of companies saying, yeah, we're actually a metaverse company too, where it's like, you look at Roblox, it's like, okay, if we're making up a list of metaverse companies and you don't have Roblox on it, I don't know how seriously I can take your list. Right. Yes, exactly. The economics here are pretty good, Chris. I do think you make

an excellent point. There are a lot of companies that are getting just tossed aside because we've decided as a group of people investing in the stock market that tech equals bad and Roblox equals tech, ergo tech equals bad, so Roblox is bad. To be fair, some of the growth wasn't exactly what the street was expecting, so the initial reaction is understandable. Yet, there may be some people who are looking under the hood here and realizing that not only is this a company that is growing, but it's a company that does generate cash. Now, to be fair, when I look at cash flow statement here. A little over $156 million in cash from operations for the quarter, that's a lot of money. $112 million of that from stock-based compensation. I tend to call that

artificial sweetener. That's a lot of artificial sweetener there. They do expend about $52 million in capital expenditures. They are funding their growth a bit on stock-based compensation. They just get some benefits from that. They're not the only company that does this. But on balance, Roblox has been a cash generator for a while here. The thing that impresses me about Roblox, there are certain companies that have certain metrics that you really want to watch to understand whether or not they're being successful. One of them that I watch is this thing called the developer exchange fees. Developer exchange fees for the quarter were $147.1 million. That was an increase of 24% over the same quarter last year. You may notice that that's not quite as high as

the overall revenue growth, but it is in line with the hours engaged, which were up 22% and the average daily active user is up 28%. Overall revenue is up 39%. But when developers are getting 24% more in fees from Roblox, basically what that's saying is, developers, hey, you're creating a lot of stuff on our platform, we're going to pay you for that because you're developing stuff on our platform. You could almost think of that, Chris, as like inventory, like Roblox paying for inventory. The fact that people are coming in and investing that amount to build up whatever it is, games, environments, add-ons, property in Roblox means that there's real investment in this platform. That should give you some hope and

should get you interested, especially with the drawdown we've seen in this stock. Let's move on to the trade desk. First quarter results out, similar situation in terms of what we saw for after-hours activity. Shares aren't up 10%, they're basically flat. that. I'm wondering if it is a similar situation with The Trade Desk, in part because Jeff Green, the CEO, on the conference call talked about how optimistic he is that The Trade Desk can create a partnership with every major streaming company, including Netflix, pair that with the reports that Netflix is telling their employees, get ready for an advertising platform version of our service this calendar year, not 2023, this calendar year, and the

fact that Disney is ramping up to do the same. Let's go to the results though. Same question, what stood out to you about the Trade Desk? Well, it's going to be more of the color on this, but let me give you a couple of numbers here to start with. The numbers were roughly darn good. Year-over-year acceleration in revenue, so revenue up 43% year-over-year versus up 37% in the same quarter a year ago. There was a net loss here and this has been a profitable company, so that's slightly disconcerting, but they're adjusted EBITDA up 38% versus up 32% year-over-year. Some good numbers there. But the Trade Desk is a story of a company in transition. We have reached a part of the advertising market, Chris, where third-party

cookies are persona non grata. We're not doing that anymore. Part of that is due to some of the shifts that Apple has made. Part of that is due to just generalized industry shifts. The Trade Desk has seen this and they have shifted their platform. They now call their newest platform, they call it Solimar. Hopefully I'm pronouncing that right. S-O-L-I-M-A-R. I don't know any other way to pronounce it. Yeah. Solimar is essentially a first party data platform. So the idea here is that the trade desk will be your platform. Solimar will be your platform of choice for using first party data, data about your customers that you have that is yours, so you're not trying to go buy it from somewhere else, and then using that to help construct relevant advertising

for that audience. You can create a whole set of revenue streams for an advertising platform using the most relevant data and not trying to disrupt privacy, things of that nature. They feel very optimistic about it. They did say on the call, 80% of their customers now, there's an 80% adoption rate. Specifically, I'm now quoting from Blake Grayson during the call saying, Solimar adoption is at over 80% and we see promising results as customers are utilizing it to leverage more data elements that they did previously. This transition to a more grounded, rich, first-party data platform, that's where the Trade Desk is heading. They think there's a lot of opportunity there. I think they're right. They're not the only

one that's moving to first-party data. We're not saying that because third-party cookies are going away, advertising is going away. We're saying we have to reimagine advertising. Trade Desk is part of that conversation. So far, they seem to be doing pretty well in this area, Chris. I like the fact that they are, for all intents and purposes, platform agnostic. It's great to see companies establishing partnerships. We've seen certainly in the case of Apple, smaller components companies do very well because they are supplying to Apple. But there is something to be said for a business like Trade Desk that says, no, we have solutions and we want to work with every major streaming company out there. The fact that Netflix and

Disney are moving in that direction. It's not to say it's a guarantee, but it certainly is an opportunity for a business like The Trade Desk. To play devil's advocate for a second here, this is a company that does generate, they say they generate a lot of cash flow, I would say they generate a trickle. They did produce during the quarter $146 million in cash from operations, but close to $125 million of that from stock-based compensation. They are a capital-light business, so they still eked out about $10 million, $10 to $15 million in real, what I would call real free cash flow. A lot of that stock-based compensation, Chris, was for general and administrative purposes, and that was up massively year over year.

So I have questions about that. There are still questions that the trade desk does need to answer. But as far as I can see, this transition and the investments they're making in Solomar are directionally correct. It is leading to revenue growth. They have more investments to make. So I would expect a little bit of volatility here over the next couple of years. Having said that, I don't fault Jeff Green for being optimistic. The market is changing. As you point out this is an open platform, lots of potential partners to work with, lots of business model changes with those partners. It's unusual for a company of this age to be sitting on a greenfield opportunity, but that is what exists here. The Trade Desk does sit on a greenfield opportunity.

It's fascinating. Chris Hill Tim Beyers, always great talking to you. Thanks for being here. Same here. Thanks, Chris. One company having a rough day in the markets is Fiverr International, ticker symbol F-V-R-R. Fiverr is an online marketplace for freelance services. Chairs are down today after their latest earnings report. We recently got a question on the Motley Fool Money hotline about Fiverr, So, we asked Asit Sharma and Bill Mann to take a closer look at the business. But first, here's the message we got.

Hi, this is Vijay from Atlanta. I just listened to your podcast dated April 18th, specifically the segment on Upstart. Could you do a similar coverage on Fiverr? It was once recommended in multi-food services, and it has gone down significantly since then. I really appreciate everything you do. Thank you so much. Have a wonderful day. Okay, Vijay, thanks for that email.

Bill, Fiverr, interesting company, double-sided platform in the gig economy, but about 83% off its all-time highs. What happened? Which is kind of a lot. I mean, obviously, 83% suggests that something is deeply wrong with the company Fiverr. So, Fiverr is an Israeli company, currently has about a $1.7 billion market cap, which is about six times its run rate revenues, which is actually, for a company that has 80% margins has grown in the last quarter at 40% plus, has incredible retention of its cohorts of buyers. On the buyer side, we're talking about buyers, we're talking about

people who are paying for the tasks to be done and the sellers are the doers of the tasks, if you will. Obviously, Fiverr benefited from COVID a lot. But I happen to think that perhaps the thing that has happened was that its backend, as we're coming out of the pandemic, fingers crossed, just hasn't been as great as people had hoped. I actually think that this company is in really, really good shape. Yeah, I agree with that. You've got a company that pulled forward a lot of sales during the pandemic when everyone was at home and remote work was such a big part of work life. But it's projected to grow this year, somewhere between 25% and 27% versus last year. It's really held on to a lot of gains. I've seen

companies that are software as a service flavor companies, which have been all over the map in terms of spiking up and then seeing revenue decline. This has been more steady, Eddie. You've mentioned the gross margin. This is a company that isn't too bad on the bottom line either. They lost, I think, about $19 million, or let's round that up to $20 million in the last quarter on $80 million in revenue. Right now, this is thumbnail math, Bill, But we're talking about, okay. Just take your socks off so you can count high enough. I can do this math because the numbers work out. About a quarter of its revenue they spend on R&D and about half of revenue they spend on sales and marketing. Now, Vijay, don't write back in and say

that was actually 22% and 48% respectively. But you get the picture here. This is a company that is investing in market share growth. Another thing that I really love about it is that super high take rate that it has. The take rate is the cut or the take a platform makes on its gross volume in terms of its gross booking value, if you want to get fancy here for a second. But just think of all the money that flows across the platform, the cut that Fiverr takes from both the buyer of the service and the seller of the service, plus a little bit of incremental add-on revenue, that is not a bad take rate at all. In fact, it's one of the highest I've seen among platform businesses.

Yeah, and it's remained very stable. Now, so you might ask, Vijay, or anybody else who's listening, I feel like we're talking to a listener at this point, but for anyone who's interested in Fiverr, what it is that they might be doing in terms of research and development? Why are they spending so much of their money in research and development? some of the things that they are doing are regionalizing and localizing tasks. They are making sure that they're up in as many languages as possible. They have a number of different new areas where they're trying to get people to focus, including having people who are voiceover actors being able to upload samples. It's a brand new area for them. So you can upload a sample

and people who are buyers who need voice work, they can just give you an audition using the sample that you've uploaded. This is a company that has very little of its revenues coming from even its largest customers, and yet, their repeat customers have been 59% of the revenue for 2021. One of the things that we look at and they describe in their report is cohorts and the cohorts they do by year. Austin, this is something that I think is really important to think about right now, maybe not on a go-forward basis, but I tend to think of almost every company in this segment as being a pre-2019 story or 2019 and before, then 2020 and 2021, I'm going to say 20 as many times as I can, and then going forward from here,

and that middle part, of course, being the pandemic. Cohorts that came on before 2019 are averaging 115% revenue increases today. That means their retained revenue for buyers who came on before the pandemic is higher than when they started with the Fiverr service. The level of retention that this company has is extraordinary. I happen to look at their pull forward as being a real positive because of the level of repeat business that they're seeing. I love that. I also love that they're able to extract more out of those buying cohorts every year. If we think about this as business interrupted, in 2019, they had a spend per buyer of $170. I think you already mentioned this, that spend is now up to $242 per buyer

on an aggregated basis as of 2021 and climbing. I love that and I like the way that they're investing. Bill, you mentioned a couple of things like the geographic localization. I the way that they're investing in different verticals that will help them pile more into enterprise customers. They've rolled out verticals in data science, data processing, data visualization. You get the picture. I think the next step is probably verticals like machine learning or robotic process automation, where companies can buy a la carte stuff that would be much more expensive to build in-house. This is really the proposition about Fiverr, which gives me a lot of confidence in it long-term. I see it continuing to grow from the most

humble of buyers and sellers all the way up into the largest companies in the planet. I think they can get great toeholds in the Fortune 1000. They're doing that already. they offer more specialized services and continue to be at the forefront of these a la carte skills, I think you have a very long path here to growth and a huge market opportunity. I think they say that their total addressable market is something like $115 billion. But we should point out, as CEO Micah Kaufman often does, that most of this freelance gig business is offline. It's not not conducted online between parties. Oftentimes, you're just using an existing relationship with a freelancer. Part of that transaction is offline. They think if they can tap into

the offline market, that's a whole other big range of revenue that they can target. Which is why that localization work that they've been doing is so incredibly important, so much of offline services involve some form of presence or involve some sort of proximity to one another. I am hopeful. I don't want to turn this into a jog about where we are in the pandemic. I am hopeful that we are, if not done, very close to done and getting back to normalized. And those out-of-home campaigns and the things that require proximity and presence, I think, are going to become much, much more important to all of us, but in particular to Fiverr. I agree. So, Bill, let's take the

last couple of minutes we have and try to dream up, where do we go wrong? Where might our thesis go wrong? I'm pretty positive on the company. I like it at these prices, as said. Again, thumbnail math, but it works out to what you were going over. I think I got their price-to-sales, if you're into those types of relative ratios, somewhere around four and five times forward sales. By the way, you don't necessarily want to jump on the price-to-sales and therefore the company is cheap, but this company does have 80% gross margin. That is a fair beginning point. Absolutely. You can project from their income statement that in a few years, you can leave that behind. There are definitely

earnings there that you can base some calculations on, and growing cash flow as well. I would say this company looks reasonable here, but what knocks us off of that theory? Where might they go wrong? As of the most recent quarter, and we We are, by the way, we're a little bit impaired because they're actually reporting in a couple of weeks. We are working on 10, 11-week-old data, which is what we've got, and it's fine. Their high value about buyers, which they define as being buyers above $500 per year, is 63% of their marketplace revenues. The fastest-growing component are the ones that spend more than $10,000. I think where we could get tripped up, and by the way, we were talking

beforehand, both you and I have publicly talked about and like this company at a higher price than it is now. So, I have seen nothing from Fiverr that suggests that they are not performing exactly as we wanted them to. They've got what I consider to be a great runway for growth, But it really could be, at the highest end, you begin to run up against a limitation for what buyers are willing to consume. I haven't seen it yet. I don't think the market has seen it yet. I just think the market, in this case, is throwing out the baby with the bathwater. Awesome. Well, Vijay, I hope we answered your question. This has been a lot of fun, Bill. We should do this again soon. Absolutely, Asit. Great to see you.

Same here, buddy. If you'd like to ask a question about a stock, you can call The Motley Fool Money hotline at 703-254-1445. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening, we'll see you tomorrow.