The gig economy of freelance and short-term contracts has its benefits but has also come under scrutiny in recent years. Despite attempted legislation to curb it, the sector has been on the rise, so we look at two companies that are benefitting from this growth.
Fiverr (NYSE: FVRR) is an Israeli online marketplace for freelance services and its name is derived from the $5 that was initially charged for gigs on the site. The company was founded in 2010 and went public in 2019, and the stock has returned over 600% since its IPO.
Fiverr reported, "record-setting growth" in Q3 2020 with revenue of $52.3 million up 88% year-over-year (YoY). It also has high gross margins of 83.4% due to its service as a product (SaaP) model. The increase in revenue was fuelled by an acceleration in the digital shift due to COVID-19 and working from home.
Fiverr has an estimated total addressable market of $115 billion and with a market cap of just over $8 billion, this leaves a large runway for growth. As well as this, the majority of freelancing is done offline and is gradually moving online.
The value proposition that Fiverr offers is clear, and it has impressive net promoter scores of 67 and 78 for buyers and sellers, respectively. The average spend on the platform has more than doubled in the last five years, from $83 to $195. This is important as the majority of revenue is made from a transaction and service fee. The number of active users has grown by 37% to 3.1 million YoY.
Fiverr is expanding its footprint after successfully entering the European market, with plans to expand into Latin America. According to management, the early signs have been positive in Brazil and Mexico, but long-term results are yet to be seen.
Fiverr's revenue growth is heavily linked to buyers' and sellers' volume, and although this has continued to grow, a drop off in the volume would hurt the business and cause revenue growth to slow. It is also operating at a loss, but this has significantly declined YoY from $8.4 million to $0.5 million. It is also trading at over 50x sales which is pricey compared to rival Upwork at roughly 16x sales but has grown at a slower pace. The regulatory risk also remains as Fiverr operates in over 160 countries, and if new regulations are brought in, this could harm the business.
Etsy (NASDAQ: ETSY) is the more well-known of these two stocks and is an American e-commerce website focused on unique products such as handmade or vintage items. The company went public in 2015 and has grown rapidly and even has Elon Musk tweeting about it.
Etsy had faced stiff competition in the past when Amazon attempted to enter the space with 'Amazon Handmade' but has prospered. Its niche offering and its mission of "keeping commerce human" have differentiated it from its competitors. Etsy estimated that its core markets represent a $249 billion market opportunity expanding to $437 billion by 2023.
Etsy reported 128% YoY revenue growth in Q3 of 2020 to $451 million and gross merchandise sales (GMS) up 119% YoY. Etsy pivoted quickly to meet demand due to COVID-19, and in the quarter, face masks made up 10% of GMS. The number of active buyers now stands at 69 million up 56% YoY, and more importantly, repeat buyers grew by 70% YoY. This engagement with the platform is vital as Etsy grows.
Etsy is increasing its marketing spend to capitalize on the recent growth, in a bid to increase its market share from the 5% that it currently has. It is attempting to market on tv and social media to build brand awareness and mindshare to drive the business going forward.
The pandemic has acted as a catalyst for growth, but as we come out the other side, Etsy's business may slow down. The data regarding the re-opening of cities have not shown any direct correlation with Etsy's traffic, so the impact on Etsy's business post-COVID-19 is uncertain. Etsy has succeeded because of the range of unique products, but this may concern investors as they question this model's scalability.
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