Hey guys, it's Sasha today I Want to tell you about a stock that I hold a big position and in fact, it's the second biggest position in my portfolio after. Tesla I Think this is one of the most undervalued stocks in the market today and I am going to share Why I Think that with you. Just a word of warning: this video is going to go seriously deep into numbers and data and Analysis I'm going to share a real deep dive with you. So it is going to be very geeky because in order to understand why I think this stock is undervalued, you really have to understand some of this analysis.

This stock is not popular, it doesn't have a big fan club on YouTube and Twitter making daily videos, and it is boring. So if you prefer to invest in the latest fad, the latest bit of hype, or you're allergic to maths, you'll probably want to go and watch the latest update on why Palantir is definitely going to one trillion dollars instead. I Will start gently and it's going to get a lot more geeky as we go. So please bear with me.

the company that I'm going to tell you about is Fiverr Fiver is a an online marketplace where you can go and buy services from Freelancers anything from creating logos and music to technicality support, coding, marketing, and a whole lot more. A week ago, Fiverr released their Q4 results. so let me show you some of the interesting bits: Revenue grew 4.2 year on year which is the lowest rate of growth by far since the company went public. And on a surface that doesn't look good.

but Fiverr is one of those companies a bit like the social media companies as well that had an abnormal rate of growth. A big growth spurt during Covid in 2019, the growth rate sat at around 40 year on year. Then 2020 came and the growth rate exploded to 82, then 88, then 89, then 100. Everyone was sat at home.

The freelancer industry was going bananas. Then in 2021, performance remained extremely strong despite that big jump in 2020.. you can see the growth year on year was at 60 in Q2, then 42 in Q3 and on Q4. And this is a year on year growth compared to the 22 20 quarters which already blew up by 90 in the first place.

So now that we're in 2022, for the cohorts that we're looking at the end of last year, the Year and year performance is lapping the two covered years which had those abnormal growth rates. So Revenue growth has fallen sharply as a result because of that lapping effect. The other interesting thing in the P L is that Fiverr has massively cut down on costs recently. You can see that General naming costs are down 53 year on year, and the other costs have stayed generally flat in Q3 five are laid off, eight percent of their staff are going into reports, and they have also been on a general cost reduction path.

You can see that the cost reduction path is the first bullet point in the Q4 Shareholder letter. As a result of this cost cutting, Fiverr came very close out of nowhere to breaking even in Q4 most projections. My projection was several years out. Before then, they had an 831 thousand dollar net loss while losing 70.9 million dollars in the whole of 2022..

Now, the key to to valuing Fiverr lies in this chart. in my opinion. On page 5 of the Shareholder letter, this is a chart that shows the return on investment per quarterly cohort and most importantly, it breaks down that return by quarter. This is incredibly important data.

Let me show you why every quarter when Fiverr publishes the results: I Go and find this chart. I Get the highest resolution version of it I Can I stick it in Photoshop and I physically measure the position of each one of those circles in pixels That lets me capture data on the quarterly performance of each cohort before we dive into the data. You can see that in the first quarter Fiverr makes about 90 return on investment. So each quarter Fiverr goes and spends a load of money on Performance Marketing and ninety percent of that money comes right back in the same quarter immediately in Revenue.

That is a pretty epic return as far as payback goes. Now, Fiverr's total marketing spending Q4 was 40.4 million dollars, and they don't publicly share what percentage of that is Performance Marketing even though they get asked on the earnings course. But because I collected 19 separate quarterly reports worth of data and I do this analysis all the time I have iteratively figured out. In my opinion I think it's sitting at about 65 of the total.

So my estimate is that around 26 million dollars a quarter is being spent on Performance Marketing and 90 of that spend comes back immediately as Revenue. So in Q4 Fiverr made a total of 83.1 million dollars and 90 of 26 million dollars. So around 23 and a half million dollars came from customers who first started using the platform during Q4. So close to 30 of the total revenue at the moment is coming in from new customers joining every quarter.

And if you then look at these circles, the gap between every two circles is how much those customers then go and make in the next quarter. You can see that the oldest cohorts on this chart Q4 2019 are making over four times the Performance Marketing spend in the three years. Cumulatively, since that cohort was books and before this latest quarter, this chart included cohort data that went back all the way to Q1 2017, and you can see that those guys are going up to 5.5 times the Performance Marketing spend as of the most recent quarter. And here is the really interesting thing about these circles.

you can see that in the first few quarters, the gaps between these circles get smaller. When a customer first signs up to Fiverr, they probably do it because they want to go and spend some money, right? But the next month, a lot of these initial customers will not be spending. They maybe only had one job to do, Maybe they didn't like the platform, Maybe they didn't need any more work? Whatever. So the second quarter earns less than in the third quarter, they spend even less so the Gap reduces and this keeps on going on and on and on for roughly the first 10 quarters.

But then look at what happens to the gaps between these circles. After 10 quarters, they start increasing. So roughly after the point at which the cohorts hit the three-year Mark something very interesting happens. The customers who don't have interest in using the platform have already dropped off.

Those customers who stay on though who have been on the platform continuity for three years and keep spending. their spend increases. and that increase in spend outweighs more customers dropping off the platform as their businesses grow, They obviously like the platform. That's why they've been buying the services on there for three years, and you can see that the oldest cohorts in this data are getting to multiples of around 5.5 times already.

Just five and a half years after joining the platform, and the gaps between the circles have increased. Remember that as Fiverr has grown, they've been able to spend a whole lot more on marketing. So the size of these cohorts is very different. The size of the new cohorts is increased massively.

The dollar value versus 2017 cohorts is much much lower than the dollar value of the most recent cohorts. If the most recent cohort was to go up to that same 5.5 multiple, that would yield about 143 million dollars in the next 5.5 years. And that's 70 percent more than the total revenue for Fiverr in the last quarter. Just coming from that one cohort that was booked at the end of last year, and you can see that the trajectory doesn't stop there.

So here is the data that I have captured from all of those green circle charts. you can see the cumulative chart by K hood on the left. The yellow lines are the worst performing cohorts. they are generally the 2018 ones and the green lines are the best performing.

They are the 2019 cohorts, but you can see a lot more detail in this chart on the right, which is the non-cumulative version of the same data. This is the chart of the gaps between all of those circles because Fiverr stopped publishing old data. The oldest lines on this chart are no longer being updated unfortunately, but there is a few key things that you can't see in this chart. The last few points on each line have gone down and there's no surprise the macroeconomic environment is bad.

Businesses are cutting back on cost, and cutting back on Freelancers is about the easiest cost that you can very quickly and easily cut back on. So Fiverr is seeing the economic downturn play out in the numbers just like everybody else now. You can also see that Kovid has had a disproportionate bump on some of the performance. The blue lines are the 2020k hordes, and their early performance was absurdly high in line with those really good green 2019 lines.

But these were cohorts booked during early covert, so a lot of the initial customers did not stick around. and they weren't organic. So you can see that those cohorts have seen performances drop since, and you can also see that the more recent cohorts have underperformed. The red lines are the 2021 and they are tracking pretty low, especially with the last two points being suppressed by the general economic downturn and the gray lines of the 2020 2K holds.

and they are doing even worse. They are tracking to be the worst set so far. These cohorts are really swimming against the tide with their performance anyway. I Looked at all of this data and I made some assumptions on what I think the average cohort is going to do in the future based on what we're seeing.

and here is that assumption overlaid on top of these lines. Remember, this is on average in the future and you can see that this projection is perhaps somewhat conservative. It is lower than most of these cohorts, especially in the out years, and in the early quarters, it is lower than all them except the most recent outliers that are being hit very hard by the economy. and after eight quarters, the projection steadily decays, just keeps on going down while the cohort line starts sort of trending slightly up.

So in the next tab, I went and built a little projection of each quarter since 2017, and then extrapolated those cohorts forward all the old code's just Decay Gradually in this model, you can see that they keep going down and down and down. even though the data does not indicate that the data suggests that at least for the first several quarters after the three-year period, they go up a little bit. But to keep things on the conservative side, each of these cohort lines just goes down every quarter and decays. These blue lines.

Here are the most recent cohorts that are underperforming. so because they are doing so badly, I manually dropped their performance to lower than what my calculations would suggest and then I Decay them from there onwards. Now, there is a chance that those cohorts do even worse than this. Maybe they won't, Maybe they will.

It doesn't really matter too much in the long term, but I have already artificially suppressed them for all future cohorts I have just gotten stuck that fat orange line remember the one from the previous slide and to the Assumption and you can see that the data here is exactly the same for every cohort, just offset by one. As you go down, it's the same line after line after line then I Need to figure out what I need to multiply all of those things by Because remember those numbers. there are the multiples of Performance Marketing budgets. So when you try to figure out what the Performance Marketing budgets going forward are going to look like, and my assumption here is pretty simple.

If you look at the cash flow statement, Fiverr continuously posts a positive cash flow from operations, which sits at just over 10 percent of Revenue they've always done it every single quarter. I Keep mentioning so I'm presuming that this is some sort of a limit factor to their ability to spend marketing dollars in internal policy of sorts. and these two orange columns here are also key assumptions. and the first one is What Proportion of Revenue is spent on marketing in total.

and you can see that this proportion in the assumptions goes down as the company grows, because as the company gets big, I'm presuming that they'll spend less and less in marketing. They'll be making profits. They'll be, you know, rewarding shareholders in whichever way. Now, if this doesn't happen, if they continue pumping money into Marketing in the future, that's going to be great.

There's going to be an upside, but I'm presuming that it goes down In the second column is the proportion of marketing spend that is Performance Marketing Because remember, all of this data on the right is as a proportion of Performance Marketing spend. So I'm assuming that Performance Marketing slowly increases from 65 right now to 73 over the next 10 years. I Actually think that some of the cost cutting that Fiverr have just done also meant that Fiverr has already massively increased to this ratio because in my iterative calculation on the cohort analysis tab I hard coded it to 65. If I just copy the formula down, it indicates that Fiverr has cut back on brand marketing the last water.

so 76 percent of the total marketing budget is now Performance Marketing but it's just one quarter of data I am not sure about the accuracy there and I thought I'd be on the conservative side so I set it to 65 regardless. So back to the cohort projections down below: I Just take each of those monthly numbers above in the table above and multiply them by that forecasted Performance Marketing spend and then I sum them all up at the bottom and you can see that this projects 83 million dollars in revenue for Q1, which is a lot lower than Fiverr's own forecast of 86.5 to 88.5 million dollars. And I think this is really because of that same Performance Marketing assumption because if I stick that 76 percent that I got in the calculation from Q4 into Q1, then the Q1 revenue comes out at 86.7 million dollars, which is bang on exactly where Fiverr is guiding. But that also gives me a huge upside on the total valuation.

So let me go and just take it back down to 65 percent to be conservative I Hope you're still following because this is where it gets pretty exciting. So far, the key assumptions are: The cohort performance assumptions are, in my opinion, pretty conservative. The Performance Marketing blend is I. Also think pretty conservative of 65 and for every old cohort I am assuming that their curves stop wherever they are and just start decaying from there for forever.

They don't go up or do anything but we're seeing them actually doing in real life and here I have the P L projection. it takes the revenue from the previous tab and I have a bunch of assumptions on cast and extrapolate the current cost. You can see that I've reduced the general naming down to 10 here. I'm not going to go into all of the details I have set Financial cost to zero again to be conservative because at the moment Fiverr is actually making money from this because they have a pile of cash and interest rates have gone up.

but I am going to take that as a buffer and just set it to zero. Now discount rate is 10 a year in my model because that's my long-term opportunity cost in the market. That's how I work it. and I set the long-term growth rate to 4.5 percent and an ebitda multiple of 20.

You could argue with these. It doesn't really matter. You can choose whatever you want. that's just what I'm using.

But using these numbers, my valuation comes in at 190 dollars using the perpetuity approach and 236 dollars using the ebitda multiple approach. and I'm leaning towards that multiple valuation because the five is expected growth rate and my personal price Target is there for 230 dollars now. Fiverr at the moment is trading at forty dollars, which is why I continued to think that it is significantly undervalued. I Have made many of these assumptions on my model more conservative in recent quarter, so my valuation has dropped as a result.

but that is still an almost 500 upside, which I think is ridiculous. Now here is an interesting way to look at it. Let me go back to my cohort projections and let's assume that Fiverr does not grow at all for the next 10 years. It just stays flat.

So each future cohort is exactly the same as the two most recent cohorts. and if I go and bastardize this model quickly. like this, the target price still comes out at around 170 dollars, while the share price right now is at 40.. But hey, let's take it one step further.

Let me go back to these projections and set all future projections to zero. So Fiverr stops getting any new cohorts right now. No future cohorts earn any Revenue All revenue in the future just comes from the cohorts that they have already booked and you can see that this future data all through here is now zero and you can see that the total revenue is now just the sum of the back book and it slowly decays over time and continues going down. Then let's go and set the future growth rate to zero as well.

and let's set the ebitda multiple to 10.. And even then, with all of this, the Target price comes in at eighty dollars, a hundred percent up on what the share price is today. And to me, this is completely nuts. By the way, all of my valuation models, including this one, are available to my channel members and patreon members at T level.

So if you want to go and get them, that's what you can do. If you don't want the models but want to join the community, talk, ask me questions, ask other people questions, You can join us an espresso member. It's just five dollars a month and you can join the discussion in the Discord I Made a more detailed breakdown of this Fiverr model and the Q4 results last week for my members. for example, if you want to join, the link is in the description so I'll see you in there.

but this is why Fiverr is such a big position in my portfolio I Think the market does not really understand this non-linear growth trajectory that they are on and I think that the company is massively undervalued I will keep buying Fiverr stock this year as and when I have cash I don't at the moment, but hopefully soon. If you found this video useful, please don't forget to smash the like button for the YouTube algorithm. Thank you so much for watching I Really appreciate it and as always I'll see you guys later.