The best investors are not right all the time. They are constantly synthesizing new information and analyzing their investments for weakness. I was very fortunate to find an excellent friend and mentor, Saul, who taught me when to sell a stock. According to Saul, the right time to sell is as soon as the narrative changes.
And every stock’s narrative changes sooner or later. Even some of the greatest stocks of all time, such as Amazon, become not worth holding anymore. I sold Amazon in March of 2020, which most people would consider as a pretty good time to buy Amazon! After all, it hit a low of $1785/share and is now trading at $3375/share. The thing is, I took that money and bought more Crowdstrike, Zoom, Livongo, and a couple other hyper growth stocks. And how did they do? Way better than Amazon.
Anyway, the example stock from the title of this article is one that I sold earlier today, none other than Fiverr. So, what was Fiverr’s narrative?
Fiverr’s narrative was one of accelerating, predictable growth. In Q1 2021, they grew revenues 22% sequentially, making it their strongest Q1 of all time. For Fiverr’s entire history as a public company, six quarters leading up to and including Q1 2021, they had beaten their guidance every single time by an average of 9%. That’s what prudent management does. Guidance given by great companies is an excellent “floor” for what revenue should beat (not just match) 95% of the time. Guidance should not be made lightly, and it should only be raised with great confidence.
Fiverr raised their full year guidance to 63% at the high end at the end of Q1. Since they had always beaten guidance, I expected this number to be beaten. I expected possibly 70% revenue growth or more for the year. Now, Q2 has finished, and they yanked guidance back down to 52%. They also just barely beat guidance for the current quarter and guided for a very weak 38% YoY growth for Q3, or -4% QoQ.
What does that tell us? It tells us Q3 is going poorly. It tells us there is uncertainty in the business. It tells us they played fast and loose with their guidance, having misread their business just one quarter ago. It tells us that Fiverr has gone from a business that was accelerating rapidly to one that is in a deceleration, a deceleration that may continue.
Now, let’s look at Fiverr’s excuse as written in the conference call:
Like many of the companies which reported their Q2 in the past 2 weeks, we also see a new post-COVID effect. Most of the world has been confined to home for the past 18 months. When COVID restrictions were lifted in the U.S. and Europe around the second half of May, people were in desperate need to get out of home and have some off-screen time. Coinciding with the summer and school holidays, people are taking vacations, which is a really healthy thing to do, and that translates to less time spent online. To be prudent, we are adjusting guidance for the fiscal year 2021 based on these incremental trends over the past few weeks.
I think if I paraphrase the above quote, I land on something like “people are tired and went on vacation”? I’m sorry, but this just sounds like a bad excuse. A bunch of people going on vacation should not be able to tank their business that much. And if it can, it tells us Fiverr’s business is weaker than previously thought.
“But what we are seeing is what we call hyper-seasonality. That is as a result of the long lockdown, online fatigue, summertime, school holidays, people just need time out-of-home now more than ever.”
So it’s hyper seasonality? Let’s see how much truth is in that. For Q3 2021, they are guiding for $72m, which is -4% growth QoQ or 38% YoY. Last year’s Q3 saw growth of 11% QoQ or 86% YoY (remember that Q3 2020 YoY results are heavily skewed by the strong covid quarter, which was Q2 of 2020). 2019 Q3 saw growth of 8% QoQ and 40% YoY, while 2018 saw growth of 11% QoQ (I don’t have YoY numbers for that far back). So for QoQ in Q3 from 2018-2021 we have 11%, 8%, 11%, and now, -4%. Seasonally, they usually make around 9% QoQ growth in Q3. Clearly -4% is way worse than any Q3 we’ve ever seen. How would this be considered hyper seasonality, or even just seasonality? To me, it’s just a bad quarter. And as far as guidance goes, they have *never* guided for anywhere near as low -4%. Before this, their weakest guidance ever was positive 3%.
I had written previously that, due to its market place business model (as opposed to my favorite business model, SAAS), Fiverr would never be a big position for me. Luckily I held true to that and collectively it was just a 5.5% position.
Bad guidance can be adjusted and trust can be won back in time, but in my opinion the bigger issue is just that management doesn’t have a good handle on the business. And the business is flimsier and not as consistent as I thought. If the excuse seemed reasonable and temporary, I would be a bit less inclined to sell. The excuse does sound temporary (hyper seasonality / people on vacation), but it does not sound reasonable. I simply don’t buy it.
Should another global-ish lockdown happen, Fiverr’s business could thrive again. And without another lockdown, the business *might* turn around and reaccelerate. But why invest in Fiverr, which has fresh question marks attached to it, when there are a dozen other companies in my portfolio that I am more confident in, with revenue growth as good or better and far fewer question marks!
You can’t predict the future, but you can interpret the present. For that reason, I sold out entirely.