At this point in time in Freelancer's journey, it is very interesting to revisit the broker report of 2016 written by Foster that posted a buy recommendation and a price target of $2.29 - https://www.freelancer.com/about/investor-pdf.php?id=29877278&name=Fosters FLN. At the time, Matt B & Co had done a tremendous job of climbing annual revenue from $1m to $50m in less than a decade. Revenue growth of 25% was assumed by Foster in 2018 to result in greater than $90m of revenue in 2018 (NPAT of $2.5m).
Since then, little has changed in terms of the fundamentals of the freelancer industry (i.e. industry market size). Albeit, the launch of VC backed competitors is concerning. However, for the company itself, Freelancer's growth has not only slowed but stopped (arguably only temporarily), with the only reported explanation due to technical issues (ie one click funnel etc.). FY2017 revenue clocked in at $50.3m (below that of FY2016).
Freelancer is a marketplace the leverages off the network effect. The network effect brings many buyers (employers) and many sellers (freelancers) to one centralized hub, thus maximising permutations for interactions and transactions. EBay was one of the first major commercial online examples of the network effect in the consumer space and still remains the most prominent example. Amazon has also moved to a network effect model. This phenomenon allows FLN to generate a high gross profit margin (85%). The introduction of major competitors in the freelancing market (last 2 years) significantly influences FLN's ability to leverage the network effect as a market leader.
Richard Koch's key rule for investing is the star principle - only invest in business that are in high growth niches / markets and that are leaders in those markets. When he invested in Betfair, he knew the company was tiny and loss-making, but growing at 60-80% a month. For FLN - we know that the industry is growing but FLN's position within the industry is debatable.
Ultimately, investing theory tells us that the single biggest predictor of company success in the long run is revenue growth. Not profits. Nor any other indicator. The Freelancer investor community has gone silent in recent years and there is really only one major change that will launch this rocket once again - a return to significant levels of revenue growth. Will Matt Barrie and Co. deliver? Only time will tell. But if he does, the investing community will once again rally behind Freelancer as a world class success story of the Australian technology industry.
FLN Price at posting:
43.0¢ Sentiment: Buy Disclosure: Held
