What sent Fiverr soaring?

Micha Kaufman Photo; Amir Meiri

Was the Israeli freelancer platform's IPO priced too low, or did the surge represent only a temporary rush of enthusiasm?

The share price of gig economy platform Fiverr International Ltd. (FVRR) shot up by 90% on the stock's first day of trading on Thursday. On Friday, it fell back, and in the end rose by 50% over two days, from the IPO price of $21 to a closing price on Friday of $31.5.

What lies behind this steep rise? First of all, it's necessary to review, at least in a simplified way, how the IPO price was set. The company valuation, and hence the share price, was determined on the basis of Fiverr's results, its forecasts, and market prices in the sector in which the company operates. When Fiverr published a prospectus a few weeks ago, it started consulting its banks (and presumably also received initial indications from investors) and decided to make its IPO at a price of $18-20 per share, giving it a valuation of around $600 million.

The company then held a roadshow (a round of meetings with investors), in which it apparently received positive indications, and it decided to make the IPO price $21, on the basis of a $650 million valuation. Fiverr chief marketing officer Gali Arnon told "Globes" that investors had expressed interest in the company's unique business model, whereby customers buy services on the Internet the way they buy products, and in the fact that the company is well adapted to a future labor market in which many more people will work freelance.

Mellanox Technologies (Nasdaq: MLNX) CEO and co-founder Eyal Waldman has talked in the past about the difficulty of coming to a decision on the pricing of shares in an offering, sometimes in opposition to the opinion of colleagues and advisers. Company managers want their new investors to benefit from a positive opening on the first day of trading, but they also don't want to sell shares at too low a price. A share offering dilutes the holding of the existing shareholders (that is, reduces the proportion of their stake in the company's total share capital), and the higher the offering price, the less will be the effect of the dilution.

There is no doubt that a market cap of nearly $1 billion must be very gratifying for Fiverr's management, and represents handsome growth over the valuation at which the company's last private funding round was held in November, when its shares were priced at almost $22, but there is no avoiding the fact that a 50% surge in the first two trading sessions raises questions about the IPO pricing, which perhaps should have been higher.

The experienced underwriters responsible for advising the company on the pricing question seem to have failed to spot the positive sentiment, or perhaps the company ignored their advice. Had Fiverr held its IPO at, say, $26 per share (halfway between the actual IPO price and the closing price after two days), then the existing shareholders would now hold 76% of the company instead of 73.5% - not terribly significant, but still money that could have been in their pockets.

On the other hand, it could be that the underwriters had an eye to the longer term, six months or a year ahead, and that they value the company at less than $1 billion. Snap Inc. (SNAP), for example, which operates camera communications app Snapchat, soared 44% on its first day of trading to $27, a level it has never seen since. On Friday, it closed at $13.69.

Fiver has yet to publish guidance for the coming year, but if it maintains its annual growth rate of 40%, its revenue will reach $106 million. On that basis, it is traded at 9.2 times forecast revenue. That is a high multiple. It is similar to that of Israeli Internet site tools company Wix.com Ltd. (Nasdaq: WIX), which has been listed since 2013 and has built a reputation as a company that repeatedly delivers good results.

Published by Globes, Israel business news - en.globes.co.il - on June 16, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

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Micha Kaufman Photo; Amir Meiri
Micha Kaufman Photo; Amir Meiri
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