COVID-19 has accelerated the rise of freelancing and has caught many investors' eye, but in this growing industry, which stock is a better buy?
There has been a significant rise in freelancing in recent years, further accelerated by COVID-19. With many people out of work, increasing numbers turn to alternative ways of making money using digital freelance platforms. The growth of these two competitors demonstrates an uptick in freelancing, but which company is a better investment?
Fiverr Bull and Bear Case
Fiverr (NYSE: FVRR) is an Israeli online freelance marketplace that was founded in 2010. Its name is derived from the $5 that was initially charged for gigs on the site and has seen explosive growth since going public in 2019.
Fiverr was founded by current CEO Micha Kaufman, who has a stake of roughly 5.5% -- a positive sign for investors that his wealth is attached to the business's performance. On Glassdoor, Fiverr has 4.5 stars out of 5, and Kaufman has a 94% approval rating, signifying a positive culture.
Fiverr reported revenue growth of $55.9 million in Q4, an increase of 89% year-over-year (YoY), and 77% growth on a full-year basis to $189.5 million with 88% gross margins. This revenue growth was fueled by increased user engagement with increased spending by sellers and the number of active buyers growing by 45% to 3.4 million. It also has an impressive net promoter score of 67 and 79 for buyers and sellers, respectively.
It estimates its total addressable market (TAM) to be $115 billion, which means there is an enormous opportunity. The majority of freelance work is currently done offline, but as this gradually changes, it presents further upside. Although investors may be skeptical of this estimated TAM, there is undoubtedly huge untapped potential.
Fiverr is trading at a rich valuation of over 50x price to sales compared to its rival, and despite a stellar year, it is also unprofitable. Its revenue growth is heavily linked to buyers' and sellers' volume, and although this has continued to grow, a drop off in the volume would stunt growth. Its success also hinges on that of the "gig" economy, and regulations in its main markets would hurt the business.
UpWork Bull and Bear Case
Upwork Inc. (NASDAQ: UPWK) was formed through a merger between Elance and oDesk and is an American freelance services website that went public in 2018. It is a first-mover in the space, but its stock price has lagged its competitors despite being up 140% since its IPO.
Upwork reported record growth since going public, with revenue increasing by 32% YoY in Q4 to $106.2 million with a gross margin of 73%. On a full-year basis, revenue growth was 24% YoY to $373.6 million. Upwork was also profitable, reporting a net income of $0.5 million compared to a loss of $5.5 million the year prior. UpWork is also trading at a lower valuation than its competitor, with a price to sales of 18x.
UpWork is not a founder-led business, and current CEO Hayden Brown only took over in January 2020, having previously worked in product and marketing in the company. Brown has successfully led the company and overseen impressive growth since being appointed. She also has an 89% approval rating on Glassdoor and Upwork has 4.2 stars out of 5.
An UpWork study found that 36% of the U.S. workforce freelanced during the pandemic, up from 19% in 2019. Coupled with working from home, Brown stated that companies are more dynamic and rethinking where work is done, and that critical work is increasingly being done "by independent talent". This shift has expanded its TAM to over $1 trillion, according to Brown.
Despite a quarterly profit, UpWork is still unprofitable on a full-year basis, with a net loss of $22.9 million compared to $16.7 million a year prior. Being the first mover in the space, many would have assumed that they would fend off competition, but Fiverr has proven that this is not the case with its ever-increasing market share. Its lower valuation is perhaps an indicator of its slower growth and lower gross margins compared to Fiverr.
So, Which Stock Is A Better Buy?
It is unlikely to be a winner takes all scenario due to the vast market opportunity, and both these companies are still relatively small. However, despite the rich valuation, Fiverr appears to be better positioned and has demonstrated its ability to grow revenue and take market share. Investors could also take a basket approach to capitalize on the freelancing trend.
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