Upwork Stock Looks Cheap (And Attractive)
$Upwork Inc.(UPWK)$ operates an online Marketplace for freelancers. The stock boomed during the pandemic when people were stuck at home but shares have fallen over 80% since. At the latest price, Upwork has now got a market value of $1.29 billion
Financials
Cash and investments: $500 million
Debt: $360 million
Enterprise Value: $1.2 billion
TTM
Revenue: $744 million
Net income: $74 million
Free cash flow: $73 million
Ratios
P/E: 18x
EV/FCF: 16x
Recent performance
That valuation is not bad when you look at Upwork's recent performance.
Average revenue growth over the last 5 years: 22%
Sales TTM: 14%
Positives
Crucially, Upwork recently turned the corner on profitability. Cost cutting help total operating expenses to decline by 10% in the latest quarter. As a result, adjusted EBITDA margin more than doubled to 21% and free cash flow surged to $33.5 million. If upwork repeats this kind of performance, free cash flow for the year could hit $134 million which would put the valuation at under 8.9 times of free cash flow. Additionally, management does think the efficiency will continue. The goal is to hit an adjusted EBITDA margin of 35% in 5 years time. However, it's not all good news.
Negatives
Gross sales volume in the quarter fell 2.7% and management reduced their revenue guidance for the full year on signs of weakness and investors are worried that artificial intelligence could disrupt the usefulness of Upwork since many upwork projects could feasibly be done by AI.
However, there's also an argument that AI could end up being a net positive for Upwork. Management said that sales volume from AI related work was up 67% year-over-year and they talked up a relationship with open AI.
2 Big problems
Even so there are still two big problems that Upwork face. The first is that no one really likes the platform. Freelancers find it hard to get work amongst the sea of low cost competition. Meanwhile, clients face frustration from too many low quality candidates and cookie cutter job proposals. The second issue is that once a freelancer has formed a relationship with a client on Upwork there isn't much that stops them taking the work outside the platform in order to circumvent the 10% fee. However, these issues have been around for years and nether have stopped the company from growing sales and clients. There's clearly value in the marketplace and this is a business that doesn't require huge capital investment. Personally, I would like to see upwork improve how it deals with these issues.
Forecast
Let's assume that Upwork can:
- Grow its topline revenue at 7% per year for the next 5 years
- Operate with a 15% net income margin
- P/E: 20x
Result:
Net income in 5 years: 156 million
Valuation: just over 3.1 billion
Annualized return: 12.4% (includes stock-based compensation)
That seems like a conservative scenario which is why I give this stock a bullish rating.
These are my personal opinions not financial advice and I do hold shares in Upwork.
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
