As megatrends go, the so-called “Gig Economy” is a ripper. An army of contractors and freelancers now work on a project basis rather than in permanent jobs.
I liken the Gig Economy to a Hollywood movie. Talented, independent workers come together to make a movie, then move to their next gig. Work is a series of projects, interspersed with time off, rather than a continuous stream of labour.
McKinsey Global Institute estimates that 20-30 per cent of the labour force in the United States and Europe comprises self-employed workers or those doing temporary work. There are up to 68 million Gig Economy workers in the US alone.
The US Freelancers Union estimates that just over one in three workers in that country is an independent worker. Collectively they earn US$1 trillion annually. Some Australian studies estimate up to a third of Australian workers do freelance work of a kind.
These figures look too high; much depends on how one defines “freelance”. But there’s no denying the declining trend of full-time workers and growth of independent contractors and freelancers. More people are working for themselves.
Three factors are driving the change. First, companies are pushing employment risks – and costs – back on workers. Rather than being stuck with full-time workers, some of whom are hard to fire, they use freelancers when and where they need them.
Second, Western companies are using freelance platforms to arbitrage lower wage costs in developing countries. An Australian business, for example, outsources data-entry work to an Indonesian firm for a fraction of the cost of using workers in this country.
Third, more workers are choosing self-employment for financial and lifestyle reasons. Technology is enabling them to build portfolios of micro-jobs and bid for work. In some ways, freelancing, when it works, has less risk than some full-time corporate jobs.
Which brings me to Freelancer, the crowdsourcing and freelancing platform that listed on ASX in November 2013 through a $15 million initial public offering (IPO). Its 50-cent issued shares soared to $2.50 on debut, making it one of the best floats in years.
Freelancer has been volatile ever since, which is usual for high-growing, emerging tech stocks. The stock hit 68 cents in early 2015, rallied to $1.80 in early 2016 and now trades at 83 cents, despite significant operational progress during that period.
Chart 1: FreelancerSource: ASX
The fundamentals do not justify Freelancer halving over 12 months. The company delivered a record FY16 result and its fastest revenue growth since the 2013 IPO. Freelancer needs to grow quickly to justify a $372 million valuation.
Net revenue rose 37 per cent to $52.7 million on a year earlier, creating a slight loss. Freelancer’s high free operating cashflow, up 207 per cent on a year earlier, is enabling the company to fund growth internally without raising debt or issuing equity.
Freelancer has made several successful offshore acquisitions that have brought users and expanded its “network effect” (a bigger network of users strengthens its competitive position and creates latent pricing power that can be exploited when needed, similar to Seek or REA Group).
The key is growth in registered users and jobs posted on its platform. Freelancer is in a race to exploit its first-mover advantage in Australian micro-jobs platforms and build global scale. If the strategy works, the valuation will be many times higher than today.
Freelancer had 23.3 million users and 10.6 million posted jobs at the end of 2016. That was the fastest jobs growth since 2010 and the users/jobs growth is on a steep climb.
The company believes the future of employment is 5 billion people looking for project-based work via online platforms. It wants to be the “eBay of jobs”. As emerging countries get better internet capabilities, the ability to connect Western companies with lower-paid workers is rapidly improving.
The company had $34.8 million in cash and no debt at the end of 2016. It is spinning off a lot of cash that is being reinvested for future growth. In time, Freelancer should have significant recurring revenue at exceptionally high margins, given its business model.
Its momentum continued in the first quarter of FY17. A pick-up in growth in accepted projects (on which the business is paid) featured. That was needed after a drop-off in the second half of FY16 because of project technology issues.
The drop in accepted projects best explains the sharp falls in Freelancer’s share price over 12 months. Hyper-growth tech stocks have little scope for disappointment; the slightest hint that platform growth is fading can crunch valuations.
Perhaps the market expected Freelancer to move to profitability faster than it has. My sense is the company is deeply committed to the “long game”; reinvesting as much surplus cash flow as possible to scale the opportunity rather than succumb to market demands for a faster transition to profit.
A sustained recovery in accepted projects is key to Freelancer’s share-price recovery. The drop in FY16 tarnished exemplary high growth in this key metric. But watch the well-run Freelancer build on recent momentum and head to new heights.
As a micro-cap tech stock, Freelancer suits experienced investors who are comfortable with higher risk. This is not a stock for the faint-hearted. Barely profitable tech stocks are hard to value and have a habit of overshooting when hype about their prospects abounds.
But they can also dramatically undershoot on the slightest bad news. For all the share-price volatility, Freelancer’s underlying business is performing strongly. Eventually the market will catch up.
• Tony Featherstone is a former managing editor of BRW and Shares magazines. The information in this article should not be considered personal advice. The article has been prepared without considering your objectives, financial situation or needs. Before acting on the information in this article you should consider its appropriateness, regarding your objectives, financial situation and needs. Do further research of your own or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at May 17, 2017.