Fiverr's Missing Profit Damps Analyst Enthusiasm in Initial Ratings

(Bloomberg) -- The end of Fiverr International Ltd.’s quiet period led to mixed ratings from Wall Street, however analysts mostly agree the online marketplace is well positioned in the growing gig economy but voiced concerns about the company’s lack of profitability.

Fiverr is poised to benefit from the evolving workplace environment, JMP notes, citing a McKinsey prediction that about 50% of workers are expected to be freelancers by 2027. Yet, UBS cautions that there’s some uncertainty from investors concerning the long term path to profitability "given the early stage nature of this industry."

"Breakeven could be a few years out, and investors may need to be patient," a Citi analyst wrote.

Fiverr Looking for Street Research Love as IPO Euphoria Wanes

The stock earned three buy-equivalent ratings and four holds, according to Bloomberg data. Fiverr shares are down 4% in early trading Monday.

Here’s a roundup of analysts initiation notes:

Needham, Brad Erickson

“Fiverr combines an attractive secular narrative around the gig economy labor mix shift with a purposefully fragmented structure that we think the market under-appreciates."

"We look for better active buyer adds, expansion into adjacent software/services, and faster localization efforts to all act as sources of upside.”

Needham estimates 2019 and 2020 revenue growth of 31% and 27%, respectively, with Ebitda profitability “probable by 2022.”

Initiates with a buy rating, “given its category leadership, strong competitive moat, high growth rate"; sets price target at $31.

Notes risks, saying “the company’s current loss-making profile may invite questions around customer acquisition efficiency.”

JMP, Ronald Josey

Starts coverage with a market outperform rating, noting the expected shift to freelance work in the next 10 years.

"The evolving workplace environment" underlies the firm’s positive view on Fiverr. "Approximately 50% of workers are expected to be freelancers by 2027, according to McKinsey, and there are ~160 million freelancers currently in the U.S. and Europe engaged in independent work."

“Fiverr’s Service-as-a-Product marketplace delivers a more friction-free transaction across its 2.1 million active buyers and 255,000 active freelancers across 200+ categories of ’gigs.’”

JMP calculates Fiverr’s total addressable market at about $160 billion, and sees it expanding as new categories, verticals and products launch.

JMP has a Street-high price target of $33.

JPMorgan, Doug Anmuth

“Fiverr has scale — 2.1 million active buyers and 255,000 active sellers transacting across 200+ categories — that we believe will continue to expand driven by the platform’s powerful network effects.”

The company provides greater transparency and removes friction for its highly fragmented user base, which help support its “attractive 25%+ take-rate.”

JPMorgan expects revenue growth to decelerate to 31% in 2019 and 26% in 2020 compared to the 45% growth in 2017 and the 42% year-over-year gain seen in the first quarter of 2019. The firm also estimates Ebitda margins at negative 23% and negative 18% in 2019 and 2020, respectively. Fiverr is “still a few years out from achieving breakeven.”

While JPMorgan recognizes that there’s is upside potential to its estimates, the firm also believes that a “bigger premium will require a few quarters of strong execution as a public company.” Initiates with a neutral rating and a price target of $30.

Citi, Mark May

"Two of the most disruptive trends in business today are 1) the power of e-commerce to provide convenience and selection for consumers that increasingly prefer on-demand experiences and 2) the desire of people to have greater flexibility in their work life."

As one of the largest online marketplaces for digital services, Fiverr is benefiting from these secular trends.

Citi is projecting a 23% five-year CAGR in revenue. “We believe that category expansion, product innovation, and greater brand/service awareness have the potential to drive higher growth.”

However, it may be a few years from now that the company reaches “breakeven.” “Investors may need to be patient – and the company may need to continue to provide data to reinforce its buyer economics.”

“Assuming that the company can achieve $600 million in revenues and a mid-20% Ebitda margin in year ten, our DCF-based valuation model suggests that a 12-month target price of $31 is reasonable.” Citi initiates coverage with a neutral rating.

UBS, Eric Sheridan

UBS begins coverage on Fiverr with a neutral rating and a price target of $29 per share.

Fiverr is well positioned to capitalize on the evolution of the Gig economy. The long-term growth potential for Fiverr lies in:

• The secular trends of increasing prevalence of flexible workforces and changes in how people work
• The shift toward online distribution and booking of these services
• More categories and depth of services offered on the platform
• Geographic expansion

UBS projects that the company grows revenue at a 24% 2018-2023 CAGR, reaching $225 million in 2023. “While core marketplace commissions are expected to remain stable in 2019 and 2020, additional service revenues should act as a tailwind to blended take rate going forward.”

“On the downside, we focus on path to profitability and competition.” UBS believes there’s “some degree of uncertainty from investors when thinking about the long-term path to profitability and margin goals given the early stage nature of this industry.”

To contact the reporter on this story: Janet Freund in New York at jfreund11@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Will Daley

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