Hi guys it's sasha today, i'm going to talk about one of the biggest stocks in my portfolio fiverr, i hold a fairly substantial amount of five, as i'm recording this video and i'll be buying more shares in the future, because i think that the market is severely Undervaluing fiverr now i think that most analysts don't actually understand how to value a company like fiverr and in this video, i'm going to explain to you in full detail why i think fiverr is so undervalued and show you my model with the target share price. Just remember that this is all just my opinion. I am not a financial advisor. I am just a random guy on youtube.

I may well be completely wrong, so make sure you do your own research, don't take what random guys on youtube. Tell you for granted. I'm just sharing my views in case you find them helpful. So in case you don't know, fiverr is an online business that provides a tool within the gig economy space.

It connects people providing services with other people or companies who want to buy those services. Anything from designing a logo to doing data analysis can all be found on the platform, and the geek economy is something that i'm really excited by, because i see the space growing a lot over the coming months and years. The world of work is changing rapidly and the way the companies think about their workforce is changing too. Aside from the impact over the last 18 months and the whole working from home thing, companies are beginning to look at their costs differently.

People are beginning to understand how to outsource their work better. In the past, companies would often have somebody employed because they needed them to do particular tasks, but there was a lot of waste with some jobs, often not really having a hundred percent workload, and companies are realizing that outsourcing can create work. That is just as good. If not better, for a small fraction of the cost of having a full-time employee go and do that work, and this is where fiverr comes in.

They provide the platform where you can go and find these people to help you with whatever it is that you need help with writing some content, creating a music track or even coding. Now fiverr is a difficult business to value. They have some unusual characteristics in their p, l, which i'm going to show you in just a second. They also have a loss making business they've been losing money every year, including 2020, although the losses are somewhat nominal once you add the depreciation and amortization and share based compensation back, the company actually made a positive nine million dollars of adjusted ebitda on the surface, though, The company's share price doesn't look good at all we're talking about a company that is valued at nine billion dollars, but only had a revenue of 189, a million dollars in 2020 and they're losing money on that revenue.

So a 50 times multiple in total sales seems somewhat ridiculous. So why would i have fiverr shares in the first place? Well, here's something interesting about how fiverr's platform works. Their business will spend marketing money to acquire customers, but those customers don't earn money right away. Those customers will earn fiverr that revenue at some point in the future.

The profit will take many months and even years, to actually show up it's because it's not a one-off purchase. Customers will typically start using the platform and then continue using it over a long period of time, which is where the long tail of revenue comes in. It is somewhat similar in some ways to platforms like amazon. In that sense, so the marketing dollars being spent today are really buying your next year's revenue revenue in 2023 and beyond now in q1, 2021 in the shareholder letter, they showed this really really interesting chart which i think most people didn't really pay attention to this chart Is critical, it tells you everything, it shows you the return on their marketing spent per quarter and if you take each cohort in this chart each of those vertical lines.

The circles above are the cumulative revenue from those customers over time quarter after quarter. So you can see that when they acquire customers, they typically roughly make a hundred percent of their marketing budget back in the same quarter. But then it takes another year or so for them to make another 100, and all of these cohorts are growing towards and hitting the 2.5 times mark consistently, and here is what you really need to look at on this graph. Look at the gaps between the circles on the way up.

If the revenue of older cohorts gradually reduces, then those gaps should get smaller and smaller noticeably with each circle and you'd naturally expect the revenue to reduce quite quickly. You come to fiverr, you buy your gig. You buy your services and you forget about the platform you go away. You never use it again right.

Well, that is not what happens with fiverr customers. Look at some of these recent cohorts: q3 and q4 2019, for example, to get enough data points in the first quarter. Those customers roughly make back the marketing losses, maybe in the second. But then, as you look up somewhere around the fourth to fifth quarter, the customers break through the two times return level.

There are only up to nine circles per quarter, just just in case you're wondering so. The quarters before q1 2019, don't have all of the circles drawn on there. They don't start higher. They start at the same place.

You just don't see all the data, i guess, if all the circles were on there, they'd probably follow the same rough pattern and start somewhere around that one times marker. But here is why this chart is so important pay attention. The gaps between the circles are reducing but they're, not reducing by much at all, which is amazing, in fact, as the platform has improved and got better over time, the older cohorts have actually accelerated the revenues. Look at the gaps between the circles towards the top of those 2017 cohorts.

I always say that it is critical to understand how a company makes money properly doing evaluation of five minutes on fiverr will tell you that you shouldn't invest. The company seems horribly overvalued, but this chart right here is ridiculous, because it is showing you something you can't see in the p l this chart is showing actual exponential growth in the business. Let me explain because this one might sound like crazy talk until you see the maths first, let me show you something that is really basic. In the p l in 2020, fiverr spent 94.4 million dollars on sales and marketing and the total operating cost was 168 million dollars.

So the marketing budget was about 56.2 percent of the total operating cost. In 2019, the marketing budget was 62.8 million dollars. So quite a bit lower, but it was 52.4 percent of the operating cost. In 2018, the marketing budget was 49.7 million dollars, which was 51.6 of the total operating cost you've.

Can you see this pattern here? This is really important because it adds to that exponential nature of the business. The marketing budget is what drives new customers into the business and in order for the business to break even those customers, if we simplify it, have to make up the total of the operating cost, plus the cost of revenue. So in 2018, the marketing budget of 49.7 million dollars needed to pay for 96.4 million dollars of operating cost and 15.6 million dollars in cost of revenue. Now this is simplifying into this or because of course, customers acquired in 2018 will have operational costs in 2019 and 2020, and the revenue in 2019 and 2020 will have a cost.

But i'm just trying to explain this point, so i'm taking a shortcut, so 96.4 million plus 15.6 million is 112 million dollars, so the 49.7 million needs a 2.25 times multiple to break even using 2020 numbers to do the same math that multiple drops to just 2.13. My favorite chart back over here says that the newer cohorts that seem to be better quality commercially get to 2.13 in about four to five quarters and over the lifetime of those cohorts, a conservative estimate is that they should hit at least a four times multiplier, based On the numbers that we see here now, the reason cohorts have actually been doing much better than the old ones, probably better marketing, better targeting and better product as well. So they might end up making considerably more so based on the data we have so far. That leaves a profit of at least 1.87 times, but probably over two times, and who knows what the long-term optics on this look like? It doesn't look like the numbers are dying even after a few years, which is incredible.

Can that multiply go to six or higher in the long term? I definitely think and can but let's assume a middle of the road assumption and let's say that those quests over time cap out at five times, multiple. So that's the maximum that they'll ever reach now after taking the 2.13 times to break. Even that leaves 2.87 times as profit. So if i take the most recent q1 results, fiverr spent 42.6 million dollars on marketing.

They ran a super bowl ad as part of that which increased the number from what it would have been, but the first data point on the chart looks pretty good. So, following this logic, if we assume the numbers we just talked about, that 42.6 million dollars in marketing spent should generate them about 122 million in profit, after accounting for the costs over the lifetime. Of that cohort say the next five to six years, maybe so here's why this chart is showing that the growth is exponential and why you can't see it in the p l at the moment, fiverr is rapidly increasing its marketing capability and spend and, as you can See they're spending all the money that they are bringing into the business back on marketing, to bring the profit number down to zero, actually just a little bit below zero, so they don't have to pay. Tax marketing is growing at over a hundred percent year on year.

At the moment, the quality of the cohorts coming through that marketing is improving. Look at the gaps between those circles on the newer cohort compared to just say the first half of 2019.. Now look back at q2 and q3 2018. Now they're missing some of those first circles, but here is the fourth and the fifth quarter on those quarters and compare it to the fourth and fifth quarter on the newer cohorts.

On top of that, the marketing spend is growing as a proportion of the total operational cost every year and the cost of revenue is dropping every year. This is really crucial. That means that every year, the break-even point for each of those cohorts is dropping. They need to make up for less cost proportionately in order for the business to begin making a profit so using this rough calculation setting at 2.13 right now, we can actually probably assume that that multiplier for breaking even will drop to two times or even lower.

In the future - and that means that a higher proportion of the total lifetime revenue will be pure profit if the total is 5x. That means that we're looking at maybe about 3x of that being net income, that's a 60 net margin, which is absolutely bonkers. This is insane so every quarter the marketing spend is going up at a huge rate. The amount of money each of those customers is earning is increasing as well, and the break even point beyond which the profit is actually made is going down.

That is pretty incredible when you multiply those things together, you get that ridiculous exponential effect, and on top of that, the older cohorts are actually benefiting from the improvements in service and platform development over time. So the upgrades every year make older customers perform better and make them even more profitable and the best thing is most people don't seem to be looking at it. This way, this is some kind of a weird secret. If you don't dig into the company just look at their p l without doing your due diligence properly, you'll just see a loss-making business where the revenues are growing.

But so are the losses. And that's because this type of business at an early stage cannot be valued on vertical performance. It can't be valued by doing a multiplier vertical just means looking at the numbers within a year, and instead with this type of business, you can't value it. That way, you have to look at it on a cohort by cohort basis.

You have to project what each of those cohorts gon na be doing in the future to understand the dynamics of those cohorts. Because, then, when you understand what these cohorts are going to be doing, when you add them up within the years in the future, that's how you get the actual numbers. I had to explain this to you, because if i didn't and just show you, the numbers you'd think i'm some kind of lunatic. Now i'm not going to go into all the details, but here is a summary of what that means in terms of the valuation.

From my perspective, remember all of this just my personal opinion. I might be very wrong with my predictions because of the strength of the recent cohorts i have the ebitda hitting just under 27 million dollars in 2021. It's actually very close to what they are saying at the upper end. I think it's going to go slightly higher than what fiverr themselves are expecting.

I am working on an adjusted ebitda here, just in case anyone actually cares. I then have the marketing budget growing at somewhere in the region of 60 to 80 percent per year, which i think is very reasonable, that cash flow supports it, but that is that growth is what creates that ridiculous exponential effect that i talked about. Actually, i actually think this is conservative, because at the moment the marketing budget is growing 134 per year. Just think about that, although the numbers look high here, the rate of growth year on year, i'm actually reducing year on year, i'm actually putting in a bit of a buffer a bit of a dampener, because this model is already running so hot and as the business Develops as this as time passes, i might reduce that dampening, but i'm just putting it there as a conservative sort of buffer.

I then set the long-term growth rate to five percent and the ebitda multiple to 20 in five years time, and that gets me to a target share price of 425 to 615 dollars. Depending on the methodology with fiverr. I would probably lean towards the latter version because of the growth that this company is experiencing. So as a result, i have a target price of 550 dollars for fiverr and i suspect that the market might take a while to catch up to that price.

It is over a hundred percent in terms of an upside for me, that is a fair price today, based on my valuation, but i think the majority of analysts just won't go into the sort of depth to model this company to understand the stock, and they won't See that growth building, because they're only looking at the overall total numbers which don't show what is happening underneath the bonnet. If you found this useful i'd, really appreciate if you could smash like button for the youtube algorithm. Thank you so much for watching. I really really appreciate it and, as always i'll see you guys later, you.