Until today, I had been with Freelancer in my personal portfolio for 4 years. Largely I think that the company has not failed drastically, nor has it fallen far from the expectations that I posted ~9 months ago within the previously attached DCF, though I have cut this both from my personal and strawman portfolio.
Freelancer typically is very difficult to predict in terms of growth rates from one quarter or one year to the next, though it is notable that the last few quarters have been softer than the market was expecting. It appears Freelancer has again fallen out of favour due to this fact with the wider market.
I have been thinking quite hard recently about the sort of business model that might have difficulty in the face of COVID-19, as well as what a broader weakening of on-market conditions will mean for stocks in my portfolio that are yet to be profitable. The conclusions that I have drawn about businesses that may/may not be able to survive short term disruption are varied, though in the case where we might experience long-term depression of on-market valuations, the impact can be summed simply by saying "funding risk has just become a structural problem."
Freelancer seems at first glance to be fully funded, with $32m cash on the balance sheet as at 31/12/3019 and achieving +$1.8m FCF throughout the prior year, however the issue that I have is in the case that there is any disruption to Freelancer's working capital.
Currently, Freelancer holds a non-cash working capital deficit of $37.6m. My understanding of this fact is that a large amount of what the company carries as "trade and other payables" is in fact user money that is held by Freelancer in 'Escrow' until a job is complete. In most recent accounts, the company attributed $32.6m in liabilities to "user obligations."
The cash that Freelancer retains for this purpose is no way negative and can be a very powerful working capital tool under normal circumstances, though it is worth pointing out that disruption to ordinary business is becoming increasingly certain in most parts of the world over the coming months. It is not clear what impact shut downs and lock-ins will have on the nature of Freelancer's business, though it is difficult to argue that it will be a positive one. I would think that a large portion of freelancers will be able to complete the kind of work typically found on the site from home and I would expect, in fact, that this is the norm. The company does carry large amounts of government work as well as work in engineering and logistics industries that certainly will not come to a standstill, though my concern is mostly surrounding the large proportion of graphic design work that is posted on Freelancer. If small, consumer-facing business is struggling worldwide I would think that far less design work would be required and it is unclear for how long this trend may continue.
It is also worth noting that Freelancer's cost base has been shown to be rather rigid. Again, ordinarliy this has been a feature of Freelancer's business that has impressed me as its combination of strict cost control and high gross margins proves excellent operating leverage, though it is not one that makes me comfortable that the company is in a robust position to handle such an unknown disruption as the fall-out from COVID-19.
With uncertainty surrounding the impact that disruption will have on Freelancer's top line, uncertainty surrounding cash flows used to adjust non-cash working capital in the case of a slow down in GPV from the Escrow business, and uncertainty surrounding on-market valuation and the associated cost of capital if funding did need to be raised, I have concluded that risks to Freelancer currently outweigh the reward.
I will continue to follow business progress closely and remain interested in purchasing shares/re-adding to strawman in the future.
