Is the sky the limit for Freelancer?

FLN, a services crowdsourcing company, yesterday reported its first half 16 results, showing very impressive revenue growth. Most readers are probably unaware what a services crowdsourcing company does exactly so here is a summary in simple terms. The freelancer app allows people needing a particular job to be completed to find someone who can complete that job. For example, someone needing a website can post the job on freelancer, at a particular price, and someone with suitable web building skills can accept the job, deliver the product, and get paid for it. The range of services that could theoretically be performed through freelancer is almost limitless. With a worldwide platform, FLN connects people from all over the world, and helps remove geographical restrictions from the services marketplace. The company today reported a 56% increase in net revenue to $26.2m with a positive operating cash flow of $4.5m. The net profit after tax was still negative, but only just so at -$0.8m, an improvement of $0.45m on the first half of 2015. Most of the cash generated is put back in to growing the business. The CEO, Matt Barrie, has a philosophy ‘with every dollar made, hire another person smarter than me…’. With a workforce of 500 employees, growing at around 25% per year, FLN has really hit the steep part of the growth curve.

 

If you like my analysis of Freelancer, you might be interested in my recent blogs on Woolworths (WOW) or Oil Search (OSH).

 

While reinvestment of income is obviously a good strategy for growing the business, it leads investors to wonder when the company will actually turn a profit. The gross payment volume for the half has skyrocketed, reaching $354.9m this half compared to $64.1m for H1 2015. With total registered users at 20 million, an approximate four times increase over the past five years, the user base of the company has been growing exponentially since the inception of the company. This level of growth would indicate that company can’t be far away from turning a profit.

Notwithstanding the impressive growth, both in revenue and registered users, the valuation of the company is pricing in very strong future growth just to reach a fair valuation. As the company currently operates at a net loss, traditional financial ratio measures don’t do a good job of valuing this company. Nevertheless, with a market capitalisation of $800m, the profit has a very long way to go before this company trades on a reasonable P/E. Of course, if you buy the marketing story that revenue could reach into the billions in the future, then the current price doesn’t look so bad. UBS was the first investment bank to start coverage on FLN, placing a ‘buy’ recommendation on the stock in April this year, sending the share price to a short term high of $1.70 after reaching lows around $1.20 before the coverage was started. The analyst placed a 12 month price target of $1.85 on FLN, a further 9% above yesterdays close price.

With total annualised revenue currently only 6.5% of the market capitalisation, the share price seems to have gotten a little ahead of itself and at these prices buying FLN would feel more like speculation than investment. Investment in companies like this at astronomical valuations assumes that growth will continue at an exponential rate and even then, it would take several years before the revenue and profit justify the valuation. Even when a company appears to have a great business model, the price, nevertheless, must be right to justify investment.

This article was written by William O’Loughlin – Local Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via william.oloughlin@rivkin.com.au or by phoning +612 8302 3600.