The gig economy in the U.S. is expected to be one of the fastest-growing sectors over the coming decade with more and more workers, both skilled and unskilled, vying for short-term, independent contracts and on-call work rather than permanent employment. As per Statista projections, the value of the gig economy is expected to grow from $248.3 billion in 2019 to $455.2 billion in 2023, which implies a compounded annual growth rate of almost 16.4%.
Given this huge expected growth, investors are bound to be looking for the best value and growth stocks that can profit from this growing economy and maximize their returns. The following are four very interesting stocks that are directly catering to the gig economy and which appear to be good investment propositions for investors to profit on its growth.
You can't discuss the gig economy without mentioning Lyft Inc. (LYFT, Financial), Uber Technologies Inc. (UBER, Financial) and the ridesharing space. Interestingly, both stocks have a strong positive correlations and follow the same trajectory.
While both companies have their own strengths and weaknesses, however, Lyft appears to be the better pick of the two. Even though it has not expanded internationally at the same scale as Uber, Lyft has the advantage of a cheaper valuation and lower levels of debt. The stock is currently trading at a price-sales ratio of 1.13, which is significantly lower than that of Uber (3.9). Also, its debt-equity ratio of 0.15 is well below Uber's 0.5, which implies a significantly lower capital gearing and relatively lower risk.
Admittedly, Lyft is burning more cash as a percentage of its revenue as compared to Uber, but the difference is not huge. Also, with an expected improvement in market perception, this stock will have a greater upside since it is trading at lower multiples.
Online freelancing websites are next on the list after ridesharing when it comes to the gig stocks, and Upwork Inc. (UPWK, Financial) is easily one of the biggest names in this sector. Its closest peer is Fiverr International (FVRR, Financial), but when comparing the two stocks, Upwork clearly stands out as the better investment proposition.
Upwork has a larger user base and a net margin of -5.17%, implying that it is much closer to its break-even point as compared to Fiverr, which is burning cash much more quickly with a net margin of -32.55%. While both companies have very low levels of debt, Upwork is actually trading at a lower valuation. Its enterprise value-to-revenue multiple of 3.51 appears quite reasonable and is almost half of Fiverr’s 6.85. It must be noted that the online freelancing space is getting more and more competitive, with many other private players like Freelancer.com, Truelancer.com, Toptal.com and Guru.com having a large market share and with the arrival sector-specialized players. However, the overall number of freelancers as well as the jobs required is expected to grow, which implies good upside for a company like Upwork.
In terms of financial strength, profitability and shareholder value creation, Etsy Inc. (ETSY, Financial) probably has the best track record as compared to its other gig economy peers. The online market place for buyers and sellers is highly profitable with a net margin of 14.14% and a return on equity of 25.84%, which is among the highest in its peer group.
Etsy’s global marketplace is popular not just in the U.S., but also in the United Kingdom, Canada, Australia, France and Germany. Its financial strength is perhaps one of the reasons why its valuation multiples are on the higher side (the stock trades at an enterprise value-to-revenue multiple of 8.09). However, Etsy started gaining some strong upward momentum as the stock has risen from around $41 in November 2019 to above $50 today. This has probably been a function of the strong outperformance delivered by management in its previous quarterly results, where its reported revenue of $197.95 million was well above analysts' expectations. If Etsy continues to deliver in the same way, the stock’s upward momentum will persist for a while and provide excellent returns to investors.
YayYo Inc. (YAYO, Financial) is a relatively lesser-known micro-cap player with a very interesting model that compliments the businesses of Uber, Lyft, Postmates, Grubhub (GRUB, Financial) and others. YayYo leases out cars and provides training, insurance and assistance to the driver community that wishes to work for these larger platforms. Currently, its scale is relatively small with about 700 cars leased out in cities such as Chicago, Los Angeles, Las Vegas, Seattle, New Jersey and Oakland, but it has strong unit economics to back the future growth.
Management notes that for every car given out on lease, the company earns a revenue of $1,700 per month and a gross margin of $800 per month. With a 98% utilization rate, the company has good enough reason to increase the size of its fleet. It has ambitious goals for 2020, aiming to have a 5,000-car fleet by the end of the year. This would send the stock price soaring even if it achieved half of this target. The company was recently in the news for the appointment of ridesharing industry veteran Boyd Bishop as president, to take over the strategic and operational oversight function. Since Bishop has a decent track record of fundraising for his previous employer, vehicle subscription company Fair, he could be instrumental in helping YayYo raise money to increase its fleet size this year. This would imply a significant upside for investors.
As illustrated in the chart above, the valuation multiples of each of these four companies have taken a royal beating. The good thing, however, is the enterprise value-to-revenue multiples seem to have stabilized. Assuming that this multiple remains stable over the coming years and these companies are able to grow at the forecasted rate of the gig economy, it would imply an annualized return of more than 16% for each of these stocks. Overall, for investors with a reasonable risk appetite looking to invest in high-growth sectors like the gig economy, it is totally worth keeping these four stocks on the radar and investing in them at the right opportunity.
Disclosure: No positions.
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