Fiverr: Right Place, Right Model
- By Panos Mourdoukoutas
Israel-based Fiverr International Ltd. (NYSE:FVRR) is in the right place with the right business model to deliver superior returns to long-term investors.
The place is a rapidly growing global market for labor services.
The business model is a "core" platform that matches buyers and sellers of approximately 300 service categories, from graphic design and digital marketing to writing and translation.
Then there are the company's "peripheral" platforms, which offer add-on services to freelancers. And Co Ventures assists freelancers with invoicing, contracts and task management. Fiverr Learn offers original course content in graphic design, branding, digital marketing and copywriting.
The timing for these platforms couldn't have been better. In recent years, the nature of work has changed from a local service performed in specific locations by traditional part-time or full-time employeers to a global service performed by remote workers and freelancers from any location.
That's where platforms like Fiverr International and Upwork Inc. (NASDAQ:UPWK) come into play, helping match buyers and sellers of freelance services.
The business model of the two platforms is similar in several respects. One of them is a rating system, which helps businesses screen potential freelancers. Then there's a payment system that releases funds when the job is completed. In addition, a dispute resolution mechanism arbitrates issues between buyers and sellers.
But there's a key difference between the two models as well. Upwork's business model begins with the demand side of the market, the buyers of services and the posting of different jobs to be performed. The Fiverr model begins with the supply side of the market, the sellers of services and the advertisement of different jobs offered.
While both models deliver the same results in theory, Fiverr's model is superior to Upwork's in practice. It provides a better market fit by limiting the "search cost," the time it takes for buyers to find the right freelancer, and addresses the problem of "asymmetric information" arising in markets where one side has better information than the other.
In this case, sellers of services know better than buyers how well they can perform a certain task. This means buyers are running the risk of hiring freelancers who are unsuitable or incompetent to do the job they were hired for.
While both companies have a customer review system to minimize the chances of buyers running into the asymmetric information problem, Fiverr's review system is more reliable. It grades freelancers' performance in a specific job category, while Upwork's system grades freelancers' performance in several job categories. That raises the chances for buyers of hiring someone who received high grades for the wrong projects.
Simply put, the Fiverr business model better serves the buyers' needs than Upwork's.
That could, perhaps, explain Fiverr's higher quarterly revenue growth and revenue per share.
Company | FVRR | UPWK |
Revenue | $163.16M | 347.76M |
Revenue per share | $5.22 | $2.74 |
Quarterly revenue growth | 87.80% | 24.00% |
Gross profit | $84.85M | $212.42 |
Market price | $205.7 | $34.84 |
Meanwhile, both companies enjoy economies of networking, which could be considered a moat to keep potential competition away and makes their competitive advantage sustainable.
In short, Fiverr is well positioned to ride the new labor market landscape, where labor has turned from a local service provided by local suppliers to local businesses to a global service provided by global suppliers to global businesses. It also delivers superior returns to long-term investors.
Disclosure: I own shares of Fiverr.
Read more here:
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
This article first appeared on GuruFocus.
