Upwork Stock Looks Cheap (And Attractive)

3-Minute Breakdowns

25 Aug 202403:26

Summary

TLDRUpwork, 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.

Outlines

00:00

📈 Upwork's Market Performance and Financial Analysis

The script discusses Upwork's online marketplace for freelancers, which saw a significant stock increase during the pandemic due to people working from home. However, the stock has since fallen by over 80%. With a current market value of $1.3 billion, Upwork has nearly $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 was $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. Despite this, Upwork has shown strong performance with an average revenue growth of 22% over the last five years and a 14% increase in sales in the past 12 months. Profitability has improved due to cost-cutting measures, resulting in a decline in operating expenses and a significant increase in adjusted EBITDA margin and free cash flow. The goal is to achieve an adjusted EBITDA margin of 35% within five years. However, there are concerns about the impact of AI on the platform's usefulness, with a potential disruption of the service due to AI's ability to perform many tasks currently done by freelancers. Despite this, AI-related work sales have increased by 67% year-over-year, and Upwork has a partnership with OpenAI. The script also highlights issues faced by freelancers and clients on the platform, such as difficulty finding work and low-quality candidates, and the tendency for freelancers to move work outside the platform to avoid fees. The author provides a conservative scenario for Upwork's growth and gives the stock a bullish rating, while emphasizing that this is a personal opinion and not financial advice.

Mindmap

Keywords

💡Upwork

Upwork is an online marketplace that connects freelancers with clients seeking various types of work. In the video, it is discussed as a company that experienced a stock boom during the pandemic but has since seen a significant drop in share value. The company's financials, market value, and future prospects are central to the video's theme.

💡Market Value

Market value refers to the total worth of a company's shares in the stock market. In the context of the video, Upwork's market value is mentioned as being $1.3 billion, reflecting the company's current financial standing and investor perception.

💡Enterprise Value

Enterprise value is the measure of a company's total value, often used as a more comprehensive alternative to equity market capitalization. It includes a firm's equity, debt, cash, and investments. The video states Upwork's enterprise value as 1.2 billion, indicating its overall economic value.

💡Revenue Growth

Revenue growth is the increase in income that a company generates over a specific period. The video highlights Upwork's average revenue growth of 22% over the last 5 years, showcasing the company's historical financial performance and growth trajectory.

💡Profitability

Profitability is the ability of a business to generate profit. The script mentions that Upwork has recently turned a corner on profitability, with cost-cutting measures leading to a significant increase in operating margins, which is a key indicator of the company's financial health.

💡Adjusted EBITDA Margin

Adjusted EBITDA margin is a financial metric that represents earnings before interest, taxes, depreciation, and amortization, adjusted for non-recurring items, as a percentage of revenue. The video discusses how Upwork's adjusted EBITDA margin more than doubled to 21%, indicating improved operational efficiency.

💡Free Cash Flow

Free cash flow is the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. The video mentions Upwork's free cash flow surge and its importance in valuing the company, with potential future projections based on this metric.

💡Gross Sales Volume

Gross sales volume refers to the total sales made before any returns or discounts are accounted for. The video notes a decline in Upwork's gross sales volume, which could signal potential issues with the company's growth or market demand.

💡Artificial Intelligence (AI)

Artificial intelligence is the simulation of human intelligence in machines that are programmed to think like humans and mimic their actions. The video discusses the potential disruptive impact of AI on Upwork's business model, as well as the possibility of AI being a net positive by increasing the demand for AI-related work.

💡Platform Issues

Platform issues refer to the challenges or problems faced by users of a particular service or system. The video outlines two main issues for Upwork: freelancers finding it hard to secure work amidst competition and clients dealing with low-quality candidates, which are significant concerns for the platform's user experience and sustainability.

💡Topline Revenue

Topline revenue, or total revenue, is the overall income generated by a company from its business activities. The video presents a conservative scenario for Upwork's topline revenue growth, which is essential for evaluating the company's future financial performance and potential investment returns.

💡Net Income Margin

Net income margin is the profit margin that reflects the amount of profit a company makes for each dollar of revenue, after all expenses and costs are deducted. The video projects a 15% net income margin for Upwork in the future, which is a critical financial target for assessing the company's profitability.

💡Stock-Based Compensation

Stock-based compensation is a form of payment to employees for services provided, in the form of equity or rights to equity in the company. The video mentions accounting for stock-based compensation, which is an important factor in evaluating a company's overall expenses and financial health.

💡Annualized Return

Annualized return is the amount of money an investment is expected to earn over a year, expressed as a percentage of the investment's value. The video calculates an annualized return for Upwork's stock, providing insight into the potential profitability of the investment over time.

Highlights

Upwork's stock boomed during the pandemic but has since fallen over 80%.

Upwork currently has a market value of $1.3 billion with 500 million in cash and investments, and 360 million in debt.

The enterprise value is 1.2 billion with revenue over the last 12 months at 744 million.

Upwork reported 74 million of net income and 7.3 million of free cash flow.

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

Average revenue growth over the last 5 years is 22%, with sales up 14% in the past 12 months.

Upwork turned profitable with cost-cutting measures, reducing operating expenses by 10 percentage points.

Adjusted EBITDA margin more than doubled to 21%, and free cash flow surged to 33.5 million.

If performance repeats, free cash flow for the year could hit 134 million, improving valuation metrics.

Management aims to achieve an adjusted EBITDA margin of 35% in 5 years.

Gross sales volume fell 2.7% in the latest quarter, and revenue guidance was reduced.

Investors are concerned about AI disrupting Upwork's business model.

AI-related work sales volume increased by 67% year-over-year, and Upwork has a relationship with Open AI.

Freelancers find it hard to get work due to low-cost competition, and clients face frustration with low-quality candidates.

Once a freelancer-client relationship is formed, there's little to stop them from taking work outside the platform to avoid fees.

Upwork has been growing sales and clients despite these issues.

A conservative scenario projects a 5-year growth of topline revenue at 7% and a 15% net income margin.

This scenario results in a net income of 156 million in 5 years and a valuation of over 3.1 billion.

The annualized return based on this scenario is about 12.4%, giving the stock a bullish rating.

The speaker's personal opinion is bullish on Upwork, but this is not financial advice.