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Fiverr: The Gig Economy Is Here

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·6 min read
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Introduction

Fiverr International's (NYSE:FVRR) main business can be easily described as a two-sided online digital services marketplace. The company was founded in 2010 by Israeli enterpreneurs Micha Kaufman and Shai Winiger.

The company's platform is designed to aggregate buyers and sellers of digital products and services. The offer is divided in nine business verticals and hundreds of different productized categories.

A digital product can range from a simple translation of a text in a specific language, to the development of a software application or a digital logo for your business.

Apart from the core business, the company owns a freelancer consultancy branch, an online learning platform for marketing professionals and some other minor businesses.

The gig economy

The term "gig economy" comes from the term gig, which means "paid, temporary job." In a gig economy, like the one we're now witnessing, more and more people are willing to offer their services as freelancers and on a limited timeline.

There are mainly three reasons why this trend is going to be more relevant over time:

  • On the seller side, a growing amount of people are willing to trade part of their salary with time to be spent with their family and friends, or simply pursuing their hobbies.

  • On the buyer side, businesses are becoming more complex and consequently require a wide range of specialized people, often for temporary tasks. Couple this with the labor shortage and you have companies continuously looking for thousands of digitized products/services to be completed on a freelance basis.

  • Finally, the availability of low-cost and powerful internet remote work and collaboration tools allows both buyers and sellers to work together in a seamless way, consequently creating the right conditions for remote collaboration. Additionally, this also has the advantage for the buyer of being able to find the right specialist in any part of the world and for the seller to find jobs that fit with their personal attitudes and life setting.


The platform

Fiverr's platform is designed in a way that facilitates the interaction (and possibly a transaction) between sellers and buyers.

Sellers create their offering by precisely describing their service (ex. scope, target, timeline) and setting a price for it. The company also provides sellers with payment processing and other tools to better showcase their offers. Everything is designed to allow sellers to spend time on what counts and not in managing their customers.

The advantage for buyers is that of accessing a wide range of talents who can perform any kind of jobs and produce results within their desired timeline. Moreover, the rating system allows buyers to both express their satisfaction and, to prospective buyers, to pick the best talents.

The idea is that of creating a powerful flywheel effect, in which more sellers attract more buyers, and vice-versa. In addition, an higher quality jobs demand attracts the best talents (but also medium-quality talents who aspire to be paid more), and this in turn, attracts more buyers, who are perennially in search of better quality, consequently closing the circle.

Fiverr: The Gig Economy Is Here
Fiverr: The Gig Economy Is Here

Source: Fiverr's Investor Presentation

Business model and take rates

Let's now have a look at Fiverr's business model. Where is the money actually coming from? Fiverr charges both buyers and sellers several types of fees. Specifically, a buyer pays a 5.5% transaction fee each time they order a service. When (and if) the work is done and the buyer accepts it, the company charges the seller a 20% transaction fee.

In the case a buyer is repetitively making use of digital services from a selected set of sellers, a common solution is that of subscribing to Fiverr Business, which allows the buyer to order as many digital services as they want for an annual subscription fee of around $150.

Additionally, the company can increase take rates when the seller pays the company to increase their visibility on the marketplace.

A seller can aim to join Fiverr Pro, a marketplace of thoroughly hand-vetted professionals who have much better probabilities of getting higher quality (and consequently better paid) service jobs from a selected pool of buyers.

One of the best metrics to evaluate the evolution of Fiverr's business is the so named "spend per buyer." As we can see from the picture below, that has been growing quite regularly over the last few years, highlighting an increased engagement of the buyers' community.

Fiverr: The Gig Economy Is Here
Fiverr: The Gig Economy Is Here

Source: Fiverr's Investor Presentation

The spend per buyer can be obtained by dividing the gross merchandise value (GMV) by the number of active buyers over the last 12 months. Active buyers as of Sept. 30, 2021 grew to 4.1 million compared to 3.1 million as of Sept. 30, 2020, an increase of 33% year-over-year, while spend per buyer reached $234 in 2021 for an increase of 20% compared to the previous year.

Competition and risks

One of Fiverr's biggest risks comes from its main competitor, Upwork Inc. (NASDAQ:UPWK). Both companies are rapidly adding buyers and sellers to their networks and apply a similar business model.

The two companies differ in the fact that Fiverr concentrates more on smaller transactions while Upwork's Enterprise branch is more developed, which means that their marketplace has more five- or six-figure transactions compared to Fiverr.

Moreover, Fiverr prefers to offer productized services while Upwork, probably also because of the nature of their customers, offers more flexibility in the job definition.

As we're still in the early stages of the gig economy expansion, it is difficult to say if there will be a clear winner, if the market will be big enough for both players to coexist and be successful, or if additional players will reach critical mass.

Additionally, as buyers and sellers work together, we cannot exclude that the repetitiveness of their interaction can create a long-term professional relationship where they don't need Fiverr anymore (and can consequently save money on take rates) to operate their businesses. This will understandably happen less often for smaller transactions, which are by nature unforeseen and unscheduled, than bigger ones, where saving take rates can be a significant advantage both for buyers and sellers.

Conclusion

Fiverr is a double-sided online digital services marketplace that operates as an aggregator of digital products connecting buyers and sellers. The company is riding the wave of the growing gig economy, taking advantage of the favourable job landscape and growing its network at an healthy rate.

The stock could be an interesting opportunity for those who believe in the long-term prospects of the gig economy, as the potential market size is huge. However, even if the stock price has decreased quite a lot since its February 2021 highs, it is probably wiser to stay on the sidelines to see how the business evolves, observe the market competitive dynamics, and, above all, when and if the company will reach profitability.

This article first appeared on GuruFocus.