Fiverr (NYSE:FVRR), the huge payments company that owns both the Clover network and First Data (as of 2019), has really taken a tumble. Investors did not like the financial outlook management provided in its Aug. 5 second-quarter shareholder letter. As a result, FVRR stock is down precipitously, almost $94 from closing at $258.60 on July 28, to $167.77 (as of the Aug. 23 close) representing a decline of 36.2%.
That’s too much. The company is still very profitable, and I suspect management may have overdone their negative forecast. At this point, FVRR stock looks like a bargain. My target price is $195 per share, or 16.3% higher than its price Monday of $167.77.
The good news is that Fiverr’s Q2 revenue grew by 60% year over year (YOY) to $75.3 million. Moreover, its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) was $7.4 million. This represented a nice 9.8% margin (i.e., adjusted EBITDA/sales).
It didn’t matter that the revenue growth exceeded expectations. The market only focused on the company’s outlook. For example, management said on page 12 of the shareholders’ letter that it expects Q3 revenue will be lower than Q2, coming in at between $68 million and $72 million. The midpoint of $70 million would be $7.3 million lower than Q2, or -7%.
Moreover — and probably more importantly — Fiverr said it expects much lower EBITDA. The company said adjusted EBITDA would fall to between $2.5 million and $3.5 million, down from $7.4 million in Q2. So, for example, at the midpoint of $3 million adjusted EBITDA would be just 4.28% of its $70 million revenue forecast. That is way down from the 9.8% adjusted EBITDA margin in Q2.
Why the drop? Management said that it expects more people to go outdoors and not buy goods and services online.
My problem with this is they could have easily predicted that same thing for Q2, but this did not trend into its results. The fact is that consumers’ outdoor activities led to higher sales for the company.
So, I would not put a lot of faith in what management is saying right now. Its forecasting may simply be a way of helping its results appear to be much better than expected when they are released.
What Fiverr Stock Is Worth
Analysts polled by Seeking Alpha forecast sales for 2021 will be $287.41 million and $377.19 million in 2022. Analyst surveys from Refinitiv and published by Yahoo! Finance on their Analysis tab for Fiverr stock confirms this $377.2 million in sales forecast for 2022. This will help us value FVRR stock.
For example, since FVRR stock has a $6 billion market capitalization, its price-to-sales (P/S) multiple for 2021 is 21 times and for 2022 it’s 15.9. So the average for these two metrics is 18.5 times.
Therefore, assuming FVRR stock will eventually have an average of both of these ratios, we can estimate that its market value will eventually hit $6.978 billion. That comes about by multiplying 18.5 by $377.2 million. This market cap represents a 16.3% gain over today’s $6 billion market value.
Therefore, our best estimate for the stock is that it will climb to $195, or 16.3% over that price of $167.77.
What to Do With FVRR Stock
Sometimes the best way to invest is to simply do the opposite of others. In this case that would be to start accumulating the shares of FVRR stock. It seems logical to assume that over time the stock will return to its average valuation.
My best guess is that buying FVRR stock here will likely lead to at least a 16% gain, if not more, especially if management’s dire forecasts do not happen. Keep in mind that at least four other analysts ranked by TipRanks.com have an average target of $220.50, or over 30% above today’s price. That is even higher than my $195 price target. So you can probably expect to make somewhere between 20% and 35% buying FVRR stock here.
On the date of publication, Mark R. Hake did not own any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.