Upwork: Plodding Along

iQoncept

As pinch astir tech related businesses, Upwork (NASDAQ:UPWK) trades astatine nan lows of nan past fewer years. The institution saw an first activity from location boost successful request for freelance work, but Upwork has now been deed by budget cuts reducing request for part-time activity pursuing impacts from nan warfare successful Ukraine. My investment thesis is ultra Bullish connected nan banal trading astatine a depressed valuation multiple.

Source: Finviz

Macro Woes

Upwork is an appealing business exemplary owed to nan accordant maturation rates arsenic nan institution perpetually adds customers and freelance workers to nan platform. In addition, nan guidance squad is building retired nan level pinch caller features pinch nan latest offering including nan way to full-time hiring of freelance workers.

For Q4'22, Upwork reported revenues grew 18.0% to a grounds $161.4 million. The institution has seen gross growth rates slow complete nan past twelvemonth pinch nan highest maturation complaint of 42% trending down to a target of conscionable 12% for Q1'23.

Source: Upwork Q4'22 shareholder letter

In nary surprise, nan freelance level is facing macro issues causing customers to reign successful spending connected caller activity assignments, moreover if nan use of moving pinch statement workers is nan expertise to not afloat perpetrate to hiring full-time employees. On nan Q4'22 net call, CEO Hayden Brown discussed contracts pushing into nan existent quarter:

And our position is, talking to customers, that a batch of them successful Q4 and coming into Q1 person really been reevaluating budgets, looking astatine their walk levels benignant of based connected nan macro uncertainty ahead, and that showed up pinch things for illustration elongated deals and things getting pushed for immoderate customers from Q4 to Q1.

The customers connected nan level proceed to grow spending pinch GSV per Active Client expanding 10% YoY to $5,045 successful Q4'22, crossing nan $5,000 period for nan first time. Upwork continues driving existing clients to walk more, including expanding nan return rate, pinch nan rumor pinch wide income maturation being nan slowdown successful caller Active Clients. While Enterprise Clients grew successful nan quarter, nan institution saw Active Clients dip 1% successful Q4 to 816,000.

Return To Profits

The champion portion of nan existent macro ambiance is that Upwork tin reign successful immoderate of nan fierce spending successful nan anterior year. The institution primitively group retired to walk aggressively connected trading successful bid to amended marque awareness.

Upwork plans to still walk $15 cardinal connected marque trading for Q1'23. At this rate, nan freelance level will walk up to 10% of revenues connected marque trading unsocial during a reliable macro climate.

The institution was somewhat adjusted EBITDA profitable successful Q4'22 and nan entirety of nan Q1'23 guided nonaccomplishment could beryllium wiped retired pinch a simplification successful marque marketing. Upwork forecasts a $10 cardinal EBITDA nonaccomplishment to commencement nan year, but nan institution predicts returning to coagulated adjusted EBITDA profits for nan 2H of nan year. The guidance for nan afloat twelvemonth is up to $20 cardinal of EBITDA profits starring to a non-GAAP EPS of up to $0.13 compared to expert estimates astatine only $0.03.

The return to profitable results is simply a promising measurement considering nan reliable macro environment. The expertise of nan freelance level to make beardown leverage connected only 13% income maturation should impressment nan market. In addition, Upwork conscionable hit nan Q4'22 gross estimates by $2.2 cardinal successful a motion of really nan institution could easy sail past nan targeted maturation rates of only 13%.

The banal ended down astir 8% successful after-hours trading providing an absorbing opportunity to bargain a maturation communicative connected a dip adjacent to nan lows. The marketplace headdress slips to only $1.6 cardinal pinch a 2023 gross target of $700 cardinal while a return to 20% maturation rates pushes 2024 revenues towards $840 million.

Source: Seeking Alpha

The unthinkable portion of nan finance communicative is that Upwork was snapped up astatine $60 erstwhile nan marketplace headdress would've been person to $8 cardinal while nan existent 2021 revenues were only $503 million. Of course, nan institution had gross maturation pushing towards 40% astatine nan time, but those maturation rates weren't sustainable anyway. Still, nan banal traded astatine complete 16x income targets and nan imaginable exists for nan adjacent upcycle to nutrient a akin premium valuation connected a overmuch larger gross base.

Either way, nan normalized guardant P/S adjacent worth aggregate is astir apt person to 5x, not nan existent 2x. Fiverr International (FVRR) trades astatine astir double nan guardant P/S ratio contempt analysts only forecasting 2023 income maturation of sub-9%.

Data by YCharts

Takeaway

The cardinal investor takeaway is that Upwork isn't being fixed in installments for maintaining coagulated double-digit gross maturation successful a reliable macro environment. As business normalizes, nan banal should attack a higher P/S aggregate balanced pinch nan 1 assigned to their manufacture peer, if not higher.

Investors should bargain nan dips successful Upwork.

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