Upwork Stock Looks Cheap (And Attractive)

Summary

Upwork, an online freelance marketplace, saw its stock boom during the pandemic but has since fallen 80%. Despite a market value of $1.3 billion, the company has strong cash reserves and manageable debt. With a recent uptick in profitability and a 22% average revenue growth over five years, Upwork is valued at 18 times earnings. However, concerns over AI disruption and platform dissatisfaction persist. If Upwork can maintain its current performance, its valuation could improve significantly, making it a potentially bullish investment, though challenges remain.

Takeaways

• 📈 Upwork's stock price has significantly dropped by over 80% since its peak during the pandemic when people were working from home.
• 💼 The company has a current market value of $1.3 billion, with $500 million in cash and investments, and $360 million in debt, resulting in an enterprise value of $1.2 billion.
• 💰 Revenue for the last 12 months is reported at $744 million, with a net income of $74 million and free cash flow of $7.3 million.
• 📊 The stock is valued at 18 times earnings and 16 times free cash flow, which is considered a reasonable valuation given Upwork's recent performance.
• 🚀 Over the last 5 years, Upwork has shown an average revenue growth of 22%, with a 14% increase in sales in the past 12 months.
• 💹 Profitability has improved, with cost-cutting measures reducing total operating expenses by 10 percentage points and adjusted EBITDA margin doubling to 21%.
• 🌐 There is potential for the free cash flow to surge to $33.5 million, which could significantly lower the valuation if sustained.
• 🔮 Management aims to achieve an adjusted EBITDA margin of 35% within the next 5 years, indicating a positive outlook for the company's financial health.
• 📉 Despite positive trends, gross sales volume fell by 2.7% in the recent quarter, and full-year revenue guidance was reduced, signaling potential weaknesses.
• 🤖 There are concerns about AI disrupting Upwork's business model, as AI could potentially handle many tasks currently performed by freelancers on the platform.
• 🛠️ However, AI could also be a net positive for Upwork, with a 67% year-over-year increase in sales volume from AI-related work and a partnership with OpenAI.
• 🔑 Two major issues for Upwork include freelancers finding it difficult to secure work due to low-cost competition and clients facing frustration with low-quality candidates.
• 🔄 The platform also faces the challenge of freelancers and clients taking work outside of Upwork to avoid the 10% fee once a relationship is established.
• 📈 A conservative scenario projects a 7% annual topline revenue growth for the next 5 years, with a 15% net income margin, leading to a potential valuation of over $3.1 billion.
• 📊 The annualized return based on this scenario is estimated at 12.4%, which is considered a bullish outlook for the stock, although it's important to note that this is not financial advice.

Q & A

What is Upwork's current market value?

Upwork's current market value is $1.3 billion.

How much cash and investments does Upwork have on its balance sheet?

Upwork has almost 500 million dollars in cash and investments on its balance sheet.

What is the Enterprise Value of Upwork?

The Enterprise Value of Upwork is 1.2 billion dollars.

What was Upwork's revenue over the last 12 months?

Upwork's revenue over the last 12 months was 744 million dollars.

What is the current valuation of Upwork in terms of earnings and free cash flow?

The stock is currently valued at 18 times earnings and 16 times free cash flow.

What has been Upwork's average revenue growth over the last 5 years?

Upwork's average revenue growth over the last 5 years is 22%.

How has cost cutting affected Upwork's profitability?

Cost cutting helped total operating expenses to decline by 10 percentage points, resulting in an adjusted EBITDA margin more than doubling to 21%.

What is Upwork's goal for its adjusted EBITDA margin in 5 years?

Upwork's goal is to hit an adjusted EBITDA margin of 35% in 5 years.

What challenges does Upwork face in terms of its platform's user experience?

Freelancers find it hard to get work due to low-cost competition, while clients face frustration from too many low-quality candidates and job proposals.

How has AI impacted Upwork's sales volume from AI-related work?

Sales volume from AI-related work on Upwork was up 67% year-over-year.

What is the potential long-term impact of AI on Upwork's business model?

AI could disrupt the usefulness of Upwork by taking over projects, but it could also be a net positive by increasing demand for AI-related work.

What is the projected annualized return on investment for Upwork if it meets certain growth and profitability targets?

If Upwork meets the conservative scenario of growing its topline revenue at 7% per year for the next 5 years and operating with a 15% net income margin, the annualized return works out to about 12.4%.

What is the potential market capitalization of Upwork in 5 years based on the given scenario?

Based on the scenario where Upwork grows its topline revenue at 7% per year and operates with a 15% net income margin, the market capitalization could just over 3.1 billion dollars.