2020 was a great year for e-commerce companies. With much of the world in lockdown, shoppers bought more goods online — supercharging the growth of e-commerce platforms everywhere. In the process, companies like Amazon, MercadoLibre, and Etsy were big winners in 2020 as you can see below.

Data by YCharts.

But those returns pale in comparison to what Fiverr (NYSE:FVRR) delivered for its shareholders. Shares of the freelancer marketplace surged more than eightfold in 2020. Like its e-commerce peers, Fiverr saw its growth accelerate during the coronavirus crisis, but there is good reason to believe this company will prosper after the pandemic is over too.

Delivering on its promises

Founded in 2010, Fiverr is a platform that connects freelancers with employers. But unlike traditional gig platforms, Fiverr transforms the recruitment process into an online shopping experience.

On Fiverr, transactions take place in the form of products, not services. Employers (or as Fiverr calls them, buyers) search for a product using a natural language-enabled, Amazon-like search bar. Once buyers find a product they like, they can place an order. Sellers (freelancers on the Fiverr platform) then deliver the product within an agreed upon time frame.

This approach makes it easy for buyers to quickly find the best products, place orders, and receive their products. In fact, Fiverr claims it has slashed the time it takes for employers to find freelancers from 30 days to 15 minutes. On the other hand, sellers benefit from a range of tools designed to help grow their businesses. For instance, Fiverr routes traffic to sellers’ “stores” where buyers can read reviews and see lists of products. Fiverr also provides payment processing, a buyer-seller chat platform, and project management software.

By reducing friction between buyers and sellers, Fiverr hopes to boost transactions on its platform. So far, its financials suggest this approach is working. Revenue hit $75 million in the second quarter of 2021, up nearly threefold from the same period in 2019. The company has benefited from a rising number of active buyers on its platform — four million of them as of the latest quarter, up from 1.8 million in 2017. Average spending per buyer has also increased from $145 in 2018 to $226 in 2021.

As Fiverr expands its user base, it also benefits from better economies of scale. In turn, this delivers improved operating leverage. In fact, the company is already profitable on an adjusted EBITDA basis (earnings before interest, taxes, depreciation, and amortization). It reported adjusted EBITDA of $7.4 million in the second quarter, up from $3.1 million year over year.

For the full year, Fiverr expects revenue to land between $280 million and $288 million. Though management revised its outlook downward in the second-quarter report, the midpoint of the new range will still amount to 50% growth over last year.As for earnings, which also took a hit with the latest update, adjusted EBITDA should total $12 million to $14 million in 2021. At the midpoint, earnings will notch a solid increase of 43% from 2020.

Image source: Getty Images.

A massive growth runway

It’s hard to find companies executing and delivering at a high level, but it’s even harder to find such companies with immense future potential at an early stage of their growth story. On both counts, Fiverr hits the spot. The company has a track record of strong operational performance and is growing in a massive industry.

Fiverr estimates U.S.-based freelancers earn about $815 billion in annual income. Within this revenue pool, the company believes its total addressable market is worth $115 billion, and that’s in the U.S. alone — the global market is probably a few times bigger. In 2020, Fiverr recorded $699.3 million in gross merchandise value, not even 1% of this market opportunity.

The company is working hard to attract new buyers while growing the amount existing buyers spend on the platform. As a start, it is moving upmarket into higher-value segments by introducing premium services. An example of this service is Fiverr Business, a white-glove service that helps large clients find the best freelancers for a specific project.

Fiverr has also rolled out a subscription feature, which helps sellers provide products to buyers on an ongoing basis — a sort of long-term working arrangement. Buyers can book repeat orders with the same seller, saving time and potentially benefiting from a discount. Along with these initiatives, Fiverr is expanding into new global markets, targeting buyers from non-English speaking countries.

Like shopping in the early 2000s, the freelancing industry is in the midst of digital disruption. The growth of e-commerce, the rising popularity of remote work, and the gig economy are just a few of the trends powering demand for Fiverr’s products. With these tailwinds and a massive addressable market, Fiverr just needs to get a few nuts and bolts right, and it can keep its growth engine running.

A steep price to pay

It’s obvious that Fiverr has a lot going for it, but all this comes at a steep price. Even after falling almost 50% from its year-to-date peak, Fiverr trades at 25 times sales. That’s extravagant considering Upworkamong Fiverr’s main rivals — trades at barely half that multiple.

And with the economy reopening, Fiverr will still need to carefully manage this transition as management has stated in its recent results. With all this in mind, investors shouldn’t rush to buy Fiverr quite yet, but it is most definitely a business worth watching.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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