Deep dive into UpWork ($UPWK)
An asymmetric opportunity
1.0 Introduction
The freelance gig economy is growing rapidly, and UpWork UPWK 0.00%↑ is well-positioned as a leading platform in this space. In this post, I will break down why I think this company is an underappreciated gem and why it is poised for long-term success.
I believe three tailwinds must be addressed before we dive into the company’s financials:
1.1 Millennial and Gen Z Workforce Preferences
Younger generations place a high value on work-life balance, flexibility, and autonomy. They prefer to be their bosses, manage their schedules, and choose projects that interest them. Given their tech savviness, the “freelance population” will only increase over time.
Below is some interesting data from a survey on this topic, supporting my rationale.
The workforce in 10 years will be significantly different than the workforce today. The number of freelancers in the U.S. alone is expected to grow at a rate of 4% per year.
1.2 Change in the educational landscape
The barrier to becoming a freelancer is low. There are numerous educational institutions and online sources (YouTube, Udacity, Coursera, edX, Pluralsight, etc.), to obtain the digital skills needed. Whether that is graphic design, data analysis, digital marketing, video editing, project management, web development, AI… The list goes on.
1.3 Companies can save resources, and be quicker to market
The traditional recruitment process may take weeks while hiring a freelancer can be done in hours. The counter-argument is - Well, how can companies be sure that they’ve hired the right person? Although there are no guarantees, unlike traditional recruitment, every freelancer has public reviews provided by previous clients. In addition, if the right person was not hired for a particular task, “unhiring” can be done much quicker and without additional costs.
The demand for freelancers by large companies is only going to increase over time. Instead of hiring a full-time employee for a project that takes 70% of the time for a few months, hiring a freelancer will prove to be the best solution. The need will be fulfilled, it will bring cost efficiency and flexibility, and it comes with access to a global talent pool. The number of clients using UpWork as of Q2-2024 stands at 868,000, and it grows at a rate of 4% per year, comparable with the growth of the number of freelancers (in the U.S.).
In addition, companies can build a continuous 24/7 work cycle, by hiring freelancers that operate in different time zones. Projects can progress around the clock, reducing the time to market.
2.0 Competition
One of the topics that is often asked - What about its competition?
Well, let’s take a step back and ask the right question - Who is UpWork competing with?
Fiverr FVRR 0.00%↑ - Although it is perceived as the main competitor, only 5% of the projects on UpWork are <$300, meaning there’s not as much overlap between the two companies as it is commonly thought. UpWork is differentiating as the go-to platform for larger projects and/or long-term job positions.
Recruitment/Staffing agencies - From Robert Half and Randstad to Pagegroup, these companies are the giants in the recruitment industry.
However, the stock prices of the last decade reflect the disappointing revenue growth, which has been below the inflation rate. The ultimate impact is that their margins are getting destroyed which is a clear sign of the disruption happening at scale, and I believe this is only the start.
Other online job boards - Although many platforms specialize in certain industries or job types, their overall size and reach are often limited. This gives UpWork a network advantage due to its larger and more diverse user base.
To summarize: UpWork’s real competition isn’t Fiverr or traditional recruitment agencies; it’s the inertia of the old way of doing business, which is rapidly changing.
3.0 Historical financial performance
Let’s take a look at the fun stuff.
UpWork’s financials tell a compelling story of revenue growth and margin expansion. What more can one ask for?
The revenue growth doesn’t come as a surprise, given the ever-growing gig economy.
But what about the margins?
As every company that relies on software, it is not capital-intensive and can scale up without significant investments. The company doesn’t need twice the assets, nor twice the employees, to support twice as much activity on its platform.
As the company grows, the economies of scale kick in, leading to margin expansion.
Between 2019 and today:
The revenue grew from ~$300m to ~$740m and the following was introduced:
Contract initiation fee
Freelance Plus subscription
Connects economy (which allows the freelancers to apply to a project)
This led to gross margin expansion from 71% to 76%.
In addition, Sales & Marketing, and General & Administrative continue to decrease as % of revenue.
This leads to improvement of the operating margin from -6% to +7%.
In the first half of 2024, UpWork generated $41m in net profits ($82m annualized). The excess cash has been used for share buybacks, and the # of shares outstanding was reduced by almost 4%, which is impressive for such a short timeframe.
4.0 Valuation
Despite all the positives within the company and the earnings report being in line with expectations, the share price was down ~10%.
The market cap of the company is $1.25 billion. Using the annualized profitability of H1-2024, the company trades at a P/E of ~15.
This is incredibly low, given the company is still growing (it grew 15% in Q2-2024 vs. Q2-2023) and its margin will expand even more.
However, the low share price should be welcomed by long-term investors, as it allows the management to buy back even more shares at a lower price.
Below is my DCF model:
Based on my assumptions, the fair value of the company is close to $1,8 billion ($13,6/share). The two key assumptions relate to the revenue growth and the operating margin. Here’s my rationale:
Revenue - As indicated above, ~4% growth should arise only from the growth in the # of freelancers. As UpWork is dominating the field, I do expect it to attract many existing freelancers as well. In addition, there is the impact of inflation (~3%/year). All of this combined should lead to at least 8% revenue growth, per year.
Operating margin - Both the CEO (Hayden Brown) and the CFO (Erica Gessert) emphasized their focus on margin expansion. Their guidance is 35% adjusted EBITDA, which translates to an operating margin of ~20%. I am more conservative in my assumptions and use 15% as the target margin instead.
Here’s how the valuation (per share) changes if you have different assumptions than mine regarding the revenue growth & the operating margin:
As I’m writing this, the share price is $9,4, which implies the market expects:
Either the operating margin doesn’t increase above ~10%, and/or
The average revenue growth over the next decade is below 4%.
Given the analysis above, I find this unlikely.
If the management delivers the guided margin expansion, the fair value today is roughly 2x today’s share price.
As the freelance economy continues to expand, I believe UpWork will increasingly be recognized for its true value.
I hope you enjoyed this post, feel free to share your thoughts.
Great analysis. I feel like Upwork should be doing better than it is. As a client, one of the frustrations is being bombarded with poor quality candidates. I suspect investors are also wary of the impact of AI and concerned about the decline in GSV?
At this price I wonder if the company might be suitable for an activist investor or an acquisition as I feel the company could be better run.
By the way, how do you get to operating margin from Adjusted EBITDA?
Management do stupid things sometimes)) I worked there)