Is Fiverr Stock Ready to Bounce Back and Deliver?

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Fiverr (FVRR 6.37%) stock may be poised for a recovery. In this Motley Fool Live segment from “Ask Us Anything,” recorded on June 1, contributors Rick Munarriz and Travis Hoium look at some important metrics for evaluating Fiverr. 

Rick Munarriz: This is always a very high-margin business in theory for Fiverr and Upwork because their revenue is pretty much easy money after they’ve done all the hard work and stuff like that. So its price to sales ratio is a very important multiple, and I don’t want to take away from that at all, just as price to earnings ratio. But you do have a case where not every price to sales ratio, not every sales number is the same, and it’s always important to see what is the margin of that sale because if you’re talking about supermarkets where these companies are lucky to have 1, 2 percent net margins at the end of the day, you’re going just to be a very low price to sales ratio, and you’re definitely not going to get the bottom-line growth that you’re expecting from that situation. Again, looking back, it’s always easy to look back and I see Travis already sharing a chart. Keep going, Travis or were you just backing up what I was saying?

Travis Hoium: I’m just trying to add the image to exactly what you’re saying.

Rick Munarriz: You’re like my cinematographer.

Travis Hoium: Yes. [laughs]

Rick Munarriz: Again, you see here, this is the gross profit margin. Basically the gross profit. You don’t see a lot of the companies that maybe in our portfolios have the 80-73 percent gross margins that you are seeing in these companies. So the price of sales, the quality of that sale is so much stronger and more important which is why when we saw sales accelerating for these companies, not that we thought it would be permanent, but just the model, the scalability of it all, what it could do to these things, and then you have the operating margin now. So it’s the operating margin of these companies.

Travis Hoium: I just wanted to point out that the expenses that go into building out the systems that you’re talking about typically goes into operating expenses. That’s the sales costs, the cost for the designers and developers, and engineers to build the platform. So every incremental sale, very high margin, but there is a lot of operating costs. So over time what you would expect is just like any SaaS business, that there’s a lot of operating leverage.

Rick Munarriz: Yes, perfect. I don’t know anyone who has any thoughts on the question. Again, obviously, we get this and I don’t think we’ve shied away from this. I come from the Rule Breaker side, so I’m not really part of the Stock Advisor team or anything, but I know our scorecard, I see the red. I want to take some Visine bottle and just squeeze the last year and a half picks because I realize that it’s been that thing where there’s a lot of revenue in scorecards. But again, for the Rule Breaker side, we’ve been at this since 2004. This is not our first-time at the bear rodeo. We know that stocks eventually bounce back, especially the quality stocks that we think were picking, and in this case, I think we both we’re relatively confident about Fiverr and/or Upwork that these are quality companies, they’re just, the business has slowed.

Again, and important thing about just growth in general, it’s with these companies, we’re talking about the growth before, about how Fiverr was growing twice as fast as Upwork. I think now you look at this year, analysts estimates this is Wall Street, not their guidance, but it roughly reflects what they’ve been hinting at. Both companies are expected to grow revenue about 20 percent, and next year it will be in the 23 percent, I believe for Fiverr and 25 percent for Upwork. But clearly slower-growing companies than we had before, Upwork is pretty much back to where was pre-pandemic Fiverr is where would it probably would’ve been if it wasn’t for the pandemic, we would’ve had 45, 42, 30, 30-ish and we probably been maybe in the 20 percent growth now.

This isn’t a bad thing, this is the evolution of companies as they grow. When you’re early in the life cycle, you can have these great spurts, once in a while maybe you’ll have an acquisition with, which you’ll pad it, which is not fair account that has growth. Or you’ll have just a case of companies just comfortable with new bar-raising product, which will be able to expand the platform. But for the most part, these companies growing at 20 percent this year in the mid 20s percent, accelerating a bit in 2023 projected to be, I think these are dynamic companies.