Upwork: Falling Stock Price And The Power Of Perception

Investment Thesis

Upwork Inc. (NASDAQ:UPWK) has seen its share price demolished. Case in point, from the highs set in the past 12 months, this stock has fallen by more than 60%. Yes, there are plenty of issues facing Upwork. I will not declare otherwise. But what I will say is, how much of that bad news isn't already priced in?

I make the case that paying approximately 11x forward EBITDA for Upwork provides investors with an enticing risk-reward profile.

Why Upwork? Why Now?

Upwork is a freelance platform. The platform provides tools for communication and secure payment processing, facilitating the entire freelance work process.

On the surface, I would have presumed that Upwork would have been slightly more immune to an economic downturn than Fiverr International Ltd. (FVRR), since Upwork's business predominantly targets larger enterprises and more of a recurring collaboration rather than small one-off tasks, typically associated with the vulnerable SMB (small and medium-sized business) part of the market.

And yet, as it transpires, Fiverr is only down 16% in the past 12 months, compared with Upwork, which is down 50%.

In hindsight, it appears that Upwork's sticky customer base, wasn't so sticky after all. And what's even more interesting, is that Upwork's newly updated terms call for a flat 10% take rate which is indeed quite low, particularly when compared to Fiverr's, which is about 3 times higher.

Furthermore, consider that up until this point, Upwork had been increasing its take rate in an effort to drive revenues higher.

Indeed, it appears that Upwork believes it can deliver more value to customers by reducing their take rate.

Here's a quote from the earnings call that provides further context into the thought behind this action:

We did conclude that the new flat fee structure is both simpler, which has a huge benefit for customers.

And also has really positive impact in terms of reducing pricing for the vast majority of talent and relationships that actually will unlock stimulate further client demand, which is the number one thing that freelancers care about other than making sure that they get paid for.

Those are the two things that people want more jobs, and making sure that they get paid for the work they're doing.

In a nutshell, Upwork is striving to stimulate the health of its platform. Because for now, Upwork's outlook for the end of 2023 leaves a lot to be desired.

Revenue Growth Rates Fizzled Out, What's Next?

As alluded to already, there's very little to entice investors to seriously consider Upwork. After all, this is a company that 12 months ago could be counted on for 26% y/y revenue growth rates.

And what's Q2 likely to end up as? I would be positively surprised if Upwork could deliver half the growth rate it reported in the same period a year ago.

Particularly given that management is actively seeking to cut costs and reduce the size of its workforce. Consequently, allow me to state the obvious now. Expectations among investors are extremely low.

Profitability Profile Could Improve Starting Q4 2023

Before discussing Upwork's profitability, it's worthwhile to get an understanding of Upwork's balance sheet. As of Q1 2023, Upwork's balance sheet had a net cash position of approximately $150 million.

Given that the business is expected to return to profitability later in 2023, this means that there's more than enough cash on its balance sheet and that the business has no near-term restrictions. Needless to say, that's a positive aspect.

Looking out to the back end of this year, Upwork's guidance implies that it will be on a path toward 15% EBITDA margins.

Consequently, if we were to presume that in 2024, Upwork's revenues could grow by somewhere around 10% in 2024, this would mean that Upwork could in 2024 report about $110 million of adjusted EBITDA.

This would put the stock priced at about 11x next year's EBITDA. For perspective, consider this.

It wasn't long ago that investors were paying more than 6x forward sales for Upwork. Today, I'm making the argument that paying around 11x forward EBITDA is a very compelling entry point.

The Bottom Line

Upwork has experienced a significant decline in its share price, dropping by over 60% from its highs set in the past year.

While the company faces various challenges, the question arises as to how much of the negative news is already reflected in its stock price?

I believe that paying around 11 times forward EBITDA for Upwork offers an appealing risk-reward profile for investors.

Further, Upwork's revenue growth rates have fizzled out, and Upwork's outlook for the end of 2023 is not enticing.

And yet, despite these challenges, Upwork still guides for alluring profitability for Q4 2023.

With a potential path toward 15% EBITDA margins and some projected revenue growth, I estimate that Upwork's stock is valued at around 11 times forward EBITDA. I declare that this is an attractive entry point.

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