Motley Fool Money - 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

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One last big number. Save up to 40% your first year. Visit LifeLock.com slash podcast for the threats you can't control. Terms apply. If you're a day trader, this probably isn't the show for you. If you're looking to own businesses, welcome. Motley Full Money starts now. I'm Chris Hill, joined by Motley Full Senior Enlist Tim Byers.

Thanks for being here. Thanks for having me. We've got companies in the realm of the entertainment industry on the DACA today, and 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 expected. 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, what stood out to you in terms of Roblox results? So, really interesting. Bookings decreased 3% to 631.2 million. By the way, can we just admit right up front? That's a lot of money. Yes.

I mean, 631.2 million. million for 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 aren't there maybe isn't enough or as much spending on the platform on a year over year basis like it's not accelerating to 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. So my message from that, Chris, is people are investing in the platform. So 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. So with the stock being up, I think there's reason to be hopeful here, Chris. And 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 You and I are talking right now in the middle of the trading day on Wednesday. The stock is up about 10 percent. Granted, it's up 10 percent 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 they're due. 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 it's, it's, their, their results aren't perfect and they're, you know, not as good as expected, so therefore it's selling off. And then you sort of 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? And I think you're absolutely right to reference the Metaverse. I mean, I fully, 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 roadblocks on it, I don't know how seriously I can take your list. Right. Yes, exactly. And 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 business. bad. And Roblox equals tech, ergo tech equals bad. So Roblox is bad. And to be fair, some of the growth wasn't exactly what the street was expecting. So the initial reaction is understandable. And yet, there may be some people who are looking out of 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, Now, to be fair, when I look at the cash flow statement here, so 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.

So I tend to call that artificial sweetener. That's a lot of artificial sweetener there. And they do expend about 52 million in capital expenditures. So 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. And the thing that impresses me about Roblox, like 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.

So developer exchange fees for the quarter were $147.1 million. and that was an increase of 24% over the same quarter last year. So 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 users up 28%. Overall revenue is up 39%. But when developers are getting 24% more in fees from Roblox, basically what that's, 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. And so that money goes to, 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, payments, add-ons, property in Roblox means that there's real investment in this platform. That should give you some hope, and it 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 percent. They're basically flat. And I'm wondering if it's, 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. Yeah. 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. But the numbers roughly darned good. Year over a 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.

So 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. So the Trade Desk has seen this, and they have shifted their platform.

They now call their newest platform. They call it Solomar. Hopefully I'm pronouncing that right. S-O-L-I-M-A-R, I don't know any other way to pronounce it. works for me. Yeah, Solomar is essentially a first-party data platform. So the idea here is that the trade desk will be your platform. Solomar 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. So 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 percent of their customers now, there's an 80 percent adoption rate. Yeah.

Specifically, I'm now quoting from Blake Grayson. during the call saying Solomar adoption is at over 80% and we see promising results as customers are utilizing it to leverage more data elements that they did previously. So this transition to a more grounded, rich first-party data platform is, that's where the trade desk is heading. They think there's a lot of opportunity there. I think they're right. I mean, I mean, they're not the only one that's moving to first-party data. You do, like, 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. And 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. Yes. 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. Right. I'll give you, so to play Devils 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, you know, close to 125 million of that from stock-based compensation. They are a capital-like business, so they still eeked 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 kind of fascinating. Tim Byers, 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 FVRR. Fiverr is an online marketplace for freelance.

Services. Jairs are down today after their latest earnings report. We recently got a question on the Motley Fool Money hotline about Fiverr. So we asked Asa Chharmah to take a closer look at the business. At 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 a 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, that's obviously 83% suggests that something is deeply wrong with the company, Fiver. 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, you know, 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. So, obviously, Fiverr benefited from COVID a lot. But I happen to think that perhaps the thing that has happened was that,

its back end 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. I mean, 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 you know, it's projected to grow this year. That means somewhere between 25 and 27 percent 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. I mean, you've got to like here. You mentioned the gross margin. This is a company that isn't too bad on the bottom line. either. I mean, they lost, I think, about 19 million bucks, or let's round that up to 20 million

bucks in the last quarter on $80 million in revenue. Right now, this is thumbnail math, Bill, but we're talking about, okay, I'm. 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, VigJ, don't write back in and say that was actually 22 percent and 48 percent, 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. So the take rate is the sort of 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 VJ or anybody else's listening. I feel like we're talking to 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 research. 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. So, 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, one of the things that we look at

at and they describe in their report is cohorts and the cohorts they do by year. And 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 and then 2020, 2020 and 2020 and 20, say 20 as many times as I can, and then going forward from here, and that middle part, of course, being the pandemic. Coords that came on before 2019 are averaging 150% 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. So the level of retention that this company has is

extraordinary. And so I happen to look at their pull forward as being a real positive because of that the level of repeat business that they're seeing. I love that. And I also love that they're able to extract more out of those buying cohorts every year. So, if we think about this as business interrupted, in 2019, they had a spend per buyer of 170 bucks. And 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. You know, Bill, you mentioned a couple of things like the geographic localization.

I love the way that they're investing in different verticals that will help them pile more into enterprise customers. So they've rolled out verticals in data science, data processing, data visualization. You get the picture. And I think that's 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. As they offer more specialized services and just continue to be at the forefront of these all-a-card skills, I think you can 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, hey, you know, most of the

You know, most of this freelance gig business is offline. It's not conducted online between parties. Oftentimes, you're just using an existing relationship with a freelancer. So, part of that transaction is offline. And they think if they can tap in to 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, because so much of offline services involve some form of presence or involve some sort of proximity to one another. And I am hopeful. I don't know what 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. You said, again, thumbnail math, but it worked. 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. So, I mean, this is a company And by the way, you don't necessarily want to jump on the, hey, price to sales, and therefore

the company is cheap, but this company does have 80% gross margin. So that is a fair beginning point. Absolutely. And 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? So as of the most recent quarter, and 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 a couple of weeks.

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. And 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 growth.

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. And this has been a lot of fun, Bill. We should do this again soon. Absolutely awesome. Great to see you. Same here, buddy. If you'd like to ask a question about a stock, you can call the Motley Full 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 ourselves stocks based solely on what you hear.

I'm Chris Hill. Thanks for listening. We'll see you tomorrow.