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The term "gig" has taken on a whole new modern meaning. Not only is it the slang term for a live musical performance, nor just a reference to the amount of memory for your hard-drive storage, but with the growth of technology and the internet, "gig" has become regular terminology for freelance workers, remote employees, and hire-for-contract employment.
The movement has sparked innovative ideas from modern entrepreneurs to build companies that some may consider to be paving the way for the future of employment. Fiverr (FVRR -4.11%) and Upwork (UPWK -2.38%) are two of the most popular companies at the head of the gig economy and have both become publicly traded companies in recent years.
As a freelancer who uses both Fiverr and Upwork (my brief story is explained toward the end of this post), as an investor, and as a curious entrepreneur, I grew anxious to know more about the companies that launched my freelance practice.
Image source: Unsplash.
I followed advice from the Oracle of Omaha himself to research companies that I love and use in the hopes of finding the gems yet to be discovered by the institutional investors. Thus, I began my analysis of the two companies as potential investments.
What is the gig economy?
The gig economy is the growing marketplace where workers and businesses together seek employment opportunities to hire and be hired for freelance work, remote work, and contractual projects.
Studies suggest that freelancers contribute $1.4 trillion annually to the U.S. economy. Furthermore, workers are more engaged when they have flexible working terms, they believe having a diversified group of clients is financially safer than having one employer, and more and more prefer to work remotely than in previous years.
Is the gig economy the future of employment?
The answer to this question will be the driving factor behind whether you see investment opportunity in the gig economy. Some may be skeptical to hire workers whom they have never met in person. Then again, the concept of ridesharing or renting out your unused rooms (Uber, Lyft, Airbnb) had people raising their eyebrows as well.
The numbers don't lie, with both Fiverr and Upwork creating marketplaces that make it a very convenient way to collaborate and work with like-minded entrepreneurs. Consider the following benefits of the gig economy for freelancers and growing businesses:
For the freelancer:
- It allows for freelancers to market their skills at their own terms and rates.
- It's convenient for freelancers to quickly connect, communicate and complete work remotely and safely.
- It allows freelancers additional ways to make money as a "side hustle" or even build a full-time freelance practice.
For the growing business:
- Business owners can hire for project-specific jobs that may be temporary work without having to hire a full-time or part-time position.
- Businesses can connect to freelancers quickly online and request work in an efficient and timely manner.
- The gig economy allows the business to truly build a network of great workers to use when certain projects are needed, while allowing freelance workers to build a network of businesses to whom they provide their specialty work as needed.
It's a true win-win economy!
A logical approach to investing in the gig economy
From an investment standpoint, finding companies in a growing industry, with little competition, and consumer monopoly all create the ultimate long position for your portfolio. Here are some surprising numbers about remote work and the growth of the gig economy.
According to Gallup's 2017 report "State of the American Workplace":
- Fully 53% of employees prefer to work in a role with flexible work-life balance, and 51% of employees said they would change jobs for a position with more flexibility.
- Employees who work from home at least 60% of the time prove to be much more engaged. This number is up from 20% back in 2012.
Another report, performed annually by Freelancers Union and Upwork, found the following:
- There are currently 57.3 million Americans doing freelance work; they contribute $1.4 trillion annually to the economy.
- At its current growth rate, the majority of the U.S. workforce will become freelance workers by the year 2027.
- Almost half of all millennials do freelance work (47%, to be exact).
The condensed version of the above statistics is simple: The number of freelance workers is growing at a very rapid pace, both in the U.S. and globally, creating a major investment opportunity.
2 stocks for the gig economy
Both Fiverr and Upwork provide the marketplace for businesses and individual freelancers to connect and be hired for jobs that require specific niche skills, and for work on an as-needed basis.
There is no question that the freelance economy is on an upward trend. As of this writing, Fiverr and Upwork generated revenue of $90.03 million and $263.06 million, respectively, or $353.09 million combined. That's only 0.025% of the $1.4 trillion market. If that doesn't spell out opportunity, I'm not sure what does!
An overview of Fiverr as an investment
Fiverr issued its IPO in early 2019, starting at $21 per share. Thus far, it's maintained its IPO offering price currently trading at about $20 per share. From a qualitative point of view, three questions come to mind for me as an investor in newly publicly listed companies. They are:
1. Does the company have a clear industry moat?
Perhaps the biggest moat in the freelance industry is similar to that of a social media platform: a network effect. In other words, the more users a platform has, the more value it provides for its current user base. Currently, Fiverr has 2.2 million buyers on the platform with a year-over-year growth of 14%. As it is with social media platforms, user base growth has a "snowball effect." As the platforms expands, so does the growth rate.
Another moat that makes Fiverr a strong company is the fact that it provides freelancers and buyers a chance to build their reputation. As orders are completed, both buyers and sellers can rate their experience and the overall quality of the final product delivery. How is this a moat? Buyers and sellers are less likely to leave the platform because they've worked hard gathering hundreds or thousands of great reviews. Freelance workers, having built a strong reputation on Fiverr, often market their Fiverr profile as a reason to hire them for work, which is just good free marketing for Fiverr.
What's more, Fiverr even provides an incentive to its sellers (freelance workers) to bring their customers who aren't currently on the Fiverr platform, and Fiverr will pass on full commission to the seller (rather than taking 20% of the transaction). This is called the BYOB (bring your own business) program, and creates a natural domino effect, expanding the customer count at a rapid pace.
2. Does the company have a clear path to profitability?
Fiverr's plan for growth and profitability is focused on two metrics: the number of buyers on its platform and the average spend per buyer. Its active buyers grew 14% year over year at last check, with the average spend per buyer growing at a rate of 16% year over year.
Its second-quarter sales were $25.9 million, a year-over-year growth of 41%. Its expected annual sales are estimated to be between $101.5 million and $103.5 million, which would be an annual growth of between 34% and 37% in revenue.
3. Does the company have a healthy balance sheet?
Positive signals I look for on a balance sheet are high amounts of cash relative to the company's size and debt. I also make sure the company isn't over-leveraged with debt.
Currently, Fiverr has $158.53 million in cash, with just $5.79 million in debt. From this standpoint alone, Warren Buffett and Peter Lynch would argue that for each share of Fiverr they purchase, they're also getting $14.87 cash, or perhaps consider that a discount on the share price.
An overview of Upwork as an investment
Like Fiverr, Upwork is a relatively new publicly traded company. Its went public in October 2018 at $15 per share. We'll ask the same questions of Upwork, looking for signs of strong growth in its initial stages.
1. Does the company have a clear industry moat?
Upwork has a different moat than Fiverr in that its platform provides more options to businesses seeking to grow from total remote workers. Its platform provides software that enables businesses to track projects, work together in teams, and find the right workers for the company.
Its platform approach to processing sales is opposite to that of Fiverr: Rather than freelancers posting work that they can do (as is the case with Fiverr), Upwork allows businesses to post work that they need done. Upwork's clear industry moat lies with the resources it provides allowing businesses to grow with a network of remote freelance workers.
2. Does the company have a clear path to profitability?
In general, if sales are increasing and costs are decreasing, it's only a matter of time before the company becomes profitable (if it isn't already profitable). Upwork is in the rapid-growth stage, awaiting to achieve profitability.
Upwork has been growing its revenue by about 24% year over year, on average, since 2016, when it went public. Furthermore, its cost of revenue as compared to its total revenue has decreased by about 5% since its IPO.
3. Does the company have a healthy balance sheet?
Upwork keeps a healthy amount of cash on hand, currently with $121.22 million in the bank. Its total debt sits at $48.92 million, just under half of the amount of cash. For a company with a market cap of $1.59 billion, I'd expect it to have more cash on hand, giving it more control over future growth.
Given that it has more cash than debt, I'd say Upwork has a relatively healthy balance sheet.
Take it from someone with firsthand experience...
I started writing finance content as a freelance writer and got some of my top clients through using Fiverr and Upwork. Originally, I began doing freelance work to make some extra income aside from my full-time job so that I could invest more money in the stock market and accelerate the growth of my overall net worth.
As I started out, I began posting a couple gigs that promoted the type of work I specialized in. At first, I would make a few sales a week, each taking a couple hours' time to complete. After a few months of work and an average of about 10 hours of work per week, I was quickly making an additional $1,500 to $2,000-plus per month. Not a bad side hustle income, not to mention the fact that I actually enjoyed the work I was doing.
Coming from firsthand experience, I could clearly see why the two companies are growing so quickly, which sparked my interest to investigate the two as potentially great growth stocks to add to my portfolio.
As it turns out, they are in clear blue waters with little to no competition, they are the two giants for the freelance market or gig economy, which gives them clear consumer monopoly, and they have barely scratched the surface of the available freelance market today. Their business operations are simple and easy to understand, and their path to profitability is clear given their rapid sales growth.
With Fiverr and Upwork, I'm in it for the long run, both as a freelancer and as an investor.
Image source: MyWallSt.
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MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in Fiverr and Upwork. Read our full disclosure policy here.
