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processing (NASDAQ:UPWK) is one of the market leaders in the market for freelancer platforms. The company almost doubled the revenue of its closest competitor Fiverr (FVRR) to $618 million versus $337 million for the full year 2022. The global freelance (or “gig economy”) platform market was valued at $3.8 billion in 2020, and it is forecast to grow at a solid 15% compound annual growth rate [CAGR], which is estimated to be worth $12 billion by 2028. As such, Upwork is poised to capitalize on this trend, especially as more companies recognize the value (and need) of a more flexible workforce. In this post, I’ll break down Upwork’s financials before revealing my valuation model and projections for the company. Let’s dive in.
Data from YCharts
Growing finances
Upwork reported strong financial results for the fourth quarter of 2022. Revenue was $161 million, beating analysts’ forecasts by $2.15 million and up 18% year over year. It should be noted that this growth rate is slower than the ~24% reported in Q3.22 and ~26% in Q2.22. However, this was to be expected given the uncertain macroeconomic environment and the hiring freeze that has occurred in many companies (even for freelance positions). The only bright spot is that this is a general trend I’ve seen across almost every company I’ve studied over the past 12 months (see my other posts), so it’s not Upwork specific. Another positive for full-year 2022 is that revenue increased 23% to $618 million, which was down just 1% from 2019/2020.
Upwork Earnings (Q4.22 data)
Taking a step back, Upwork’s Gross Service Volume [GSV] can be considered the true “top line”. This metric is similar to Gross Merchandise Volume [GMV] for an e-commerce company. In this case, GSV increased 5% year over year to $1 billion in Q4 22. For full year 2022, this metric increased a faster 16% year over year to $4.1 billion.
Gross Service Volume (GSV) (Q4.22 data)
By my calculations, Upwork takes ~15% fee for freelancer services. On his website, I calculated the fees on a $1,000 bill. In this case, the freelancer would “take home” 85%, or $850, while Upwork would take $150. Overall I think this is a solid model and not overly detrimental to the freelancer or the company hiring the worker. I see this as a 15% tax, similar to Value Added Tax or Value Added Tax which is common in many countries.
Upwork Fee Calculator (Q4.22 report)
Upwork has expanded its business into a “hybrid service” model. This basically combines the best of a “platform” with a traditional staffing model. So this includes everything from talent management to sales to payroll to B2B marketing.
Upwork business model (Q4.22 report)
The most notable application of Upwork’s advanced platform is in enterprise service. I believe this could be an immensely lucrative part of the platform given the lack of stickiness in small businesses in my experience. For example, I’ve used Upwork a few times at my marketing agency, but never consistently. The problem is that the quality of freelancers varies greatly and trust needs to be built first, which takes time. On a positive note for the enterprise segment, Upwork has specific features to strengthen this product. This includes user activity reports, talent performance reports, and flexible workflow approvals. Company revenue increased 22% year-on-year to $12.8 million in Q4 22. Although this segment represented only 7.95% of total revenue for the quarter, the potential is huge.
corporate earnings (Q4.22 data)
Upwork added 22 new enterprise customers in Q4. Among them were well-known brands such as HTC, Lucid Motors (LCID), JLL, Sweetwater Sound and many more. However, it should be noted that the company was able to increase its sales cycles by ~20% and its new customer acquisition rate was not as high as the 32 achieved in Q4, 21.
A macro positive for Upwork is the tight labor market, with an unemployment rate of just 3.6% for the US reported for February 2023. Therefore, despite the “tech layoffs,” it seems there are still a lot of people working, even more than in 2018.
US Unemployment Rate (Q4.22)
margins and balance sheet
Turning to profitability, the company reported earnings per share [EPS] of minus $0.13, beating analysts’ forecasts by $0.06. Net loss also improved to minus $16.5 million in 4Q22 from minus $22.6 million in 4Q21, which was a positive sign.
net loss (Q4.22 data)
Upwork is expected to generate further signs of operating leverage over the long term. R&D spending is expected to be between 15% and 20% of sales, compared to 21% in FY2022. S&M spending is expected to fall between 20% and 25%, compared to 37% in FY2022, which is a positive sign . Researching online, I found that the company gets ~77% of its massive website traffic (44 million visits) from direct searches. This is very positive as it means Upwork has a strong brand and customer acquisition costs should continue to fall as a result. The company has also forecast that G&A expenses will fall to 8% to 10% as a percentage of sales over the long term.
Expenditures and margins Long term (Q4.22 data)
Upwork has a solid balance sheet with $686.6 million in cash and short-term investments. The company has a fairly hefty total debt of $581.9 million, but the vast majority of that ($564 million) is long-term debt and therefore manageable.
Evaluation and Forecasts
To score Upwork, I fed its latest financial data into my discounted cash flow valuation model. I only forecast 11.6% revenue growth for “next year” or full year 2023 in my model. This level is based on the lower end of management’s guidance of $690 million to $705 million for 2023. This growth rate would be slower than the 18% achieved in Q4’22 and is primarily driven by the macroeconomic environment. For years 2 to 5, I forecast a return to the 18% growth rate achieved in Q4.22. This is based on an economic recovery that would follow historical trend.
Upwork stock rating 1 (Created by the author Deep Tech Insights)
To increase the accuracy of my model, I turned on R&D spending, which increased the net profit. I have projected a pre-tax operating margin of 15% for the next 8 years, which should be achievable given that the average margin in the software industry is 23%. I expect this to be driven by improved operational leverage in business spending, as noted.
Upwork stock rating 1 (created by the author Deep Tech Insights)
Given these factors, I’m getting a fair value of $25 per share. UPWK stock is trading at ~$10 per share at the time of writing, over 60% undervalued based on my model and forecasts.
Upwork also trades at a price-to-sales multiple of 2, which is significantly cheaper than its historical level of over 6. The company also trades at a cheaper valuation than Fiverr, which trades at a P/S of 3.4 is traded.
Data from YCharts
risks
competition/recession
As mentioned above, the main competitor in the freelance platform space is Fiverr, which basically offers the same service. I’ve personally tried both platforms, but have found that I use Upwork more often. Other platforms include Amazon’s (AMZN) “Mechanical Turk”, Toptal, Jooble, etc. As mentioned in the introduction, Upwork is the market leader by revenue, so despite competition, it’s not big given the huge total addressable market (~$12 billion dollars by 2028). However, the projected “recession” is a risk for Upwork, and its growth rate is already starting to slow.
Final Thoughts
Upwork is the leading marketplace for freelance talent and has performed well with its financials beating analysts’ forecasts for Q4 ’22. Management moving into the company could signal a lucrative market opportunity if the company can offer value to this industry. I expect the company to face a rough patch throughout 2023 as companies scale back hiring. However, since my valuation model and forecasts indicate that the stock is inherently undervalued, I will consider it a “buy” at the time of writing.
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