Fiverr International (NYSE: FVRR), once a star of the early pandemic era, has seen a dramatic fall from grace, with its stock plummeting 93% from its peak in February 2021. This steep decline has left many investors skeptical about its long-term viability.
The latest concerns revolve around the potential threat posed by artificial intelligence (AI) to Fiverr’s business model. The fear is that AI could automate many of the tasks currently performed by freelancers on Fiverr, jeopardizing the platform’s future.
However, this concern seems overblown. Despite recent setbacks, this small-cap stock still holds significant potential.
Fiverr’s platform connects service providers (freelancers) with service seekers, facilitating transactions by managing payments, communications, troubleshooting, and more. In return, Fiverr takes a commission on each transaction.
During the COVID-19 pandemic, the demand for freelancing surged as lockdowns forced businesses to shut down physical offices. This led to a rapid increase in Fiverr’s revenue and stock price. But as pandemic restrictions eased, the growth slowed, leading to a sharp decline in the stock price.
Crucially, Fiverr’s revenue did not decline; it simply grew at a slower pace.
Understandably, this volatility has made some investors wary. However, Fiverr has made notable progress over the past few years. The company turned cash flow positive in 2020 and became GAAP profitable last year. Additionally, Fiverr has increased its take rate (the commission it earns on each transaction) from 27.1% in Q1 2020 to 32.3% in Q1 2024.
The increasing take rate indicates that Fiverr’s platform remains valuable. This suggests Fiverr has “pricing power,” as it wouldn’t be able to raise its take rate if users didn’t see value in the platform. This bodes well for its future prospects.
The rise of AI is seen as the latest challenge to Fiverr’s business model. The concern is that as AI becomes more capable of performing tasks currently offered by freelancers, the demand for these services on Fiverr might decline, leading to a decrease in service providers on the platform.
While generative AI can indeed handle tasks like writing, document analysis, and image creation, it also presents new opportunities. In Fiverr’s Q1 earnings call, management noted that AI has been beneficial for the platform, creating demand for more complex tasks that are more profitable and harder to replicate. Demand for AI-related services grew by 95% year-over-year in Q1, and the platform now hosts 10,000 AI experts offering services to help clients integrate AI into their businesses. Additionally, spending per buyer grew by 8% year-over-year in Q1, indicating that Fiverr is successfully moving “upstream” to larger clients who spend more on services.
Fiverr’s ability to adapt to more complex work highlights its potential to remain a key player in the long term. As it becomes a go-to platform for outsourcing labor, especially for small and enterprise-level businesses, its future looks promising.
Fiverr’s investment case is strong for several reasons. First, as the effects of the pandemic recede, Fiverr could see renewed revenue growth. Analysts project mid-single-digit revenue growth this year, with an acceleration to 10% in 2025 and 15% in 2026. Given the company’s newfound profitability, these increases in revenue could translate into significant earnings growth.
Moreover, Fiverr’s stock is currently trading at a forward P/E ratio of under 10, a valuation more typical of a struggling company than one on the cusp of renewed growth. This low valuation suggests significant upside potential, as there’s limited room for the stock to fall further.
While these projections are based on estimates and the actual outcomes remain to be seen, Fiverr’s solid financials and management’s optimistic view of AI’s impact provide a compelling case for the stock’s future potential.
Source: Yahoo Finance
