Upwork Stock: A Different & Better Bet On The Gig Economy? (NASDAQ:UPWK)

About 3 weeks in the past, I coated one in every of my favourite shares that may be a direct beneficiary of the gig financial system, Fiverr (FVRR). Right now, I’ll talk about one other smaller holding in my portfolio that’s main the house inside the gig financial system in a barely totally different vogue. Upwork’s (NASDAQ:UPWK) mission is to “create financial alternatives so everybody has higher lives”. Buying and selling close to its 52-week lows, I imagine UPWK offers vital long-term upside to traders as we speak at present ranges.

Overview

Just like Fiverr, Upwork manages a market connecting companies to unbiased expertise. Just like many middlemen and market companies reminiscent of DoorDash (DASH), Uber (UBER), Lyft (LYFT), Fiverr, and Airbnb (ABNB), Upwork operates a fee-based mannequin by which it costs purchasers and freelancers cash for using its platform. Sporting over 10,000 expertise throughout 50+ classes, Upwork’s international group of expertise has no matter you want, from graphic design to ghostwriting to consulting.

As of FY’2021, Upwork’s GSV (gross service quantity) was a whopping $3.5 billion, making it the world’s largest market by this metric.

Most just lately in F’21, UPWK elevated its GSV by 38%. Upwork derives income from two totally different sources.

1. Market Income
2. Managed Providers Income

Upwork’s market income accounts for 92% of all gross sales, with the remaining targeted on managed companies. The corporate’s market income is derived into 4 totally different segments, as described in its 10-Okay.

Upwork Fundamental: The only of the 4 choices, Upwork Fundamental offers purchasers with entry to unbiased expertise with a verified work historical past within the market.

Upwork Plus: Along with Upwork’s Fundamental providing, Upwork Plus purchasers can entry personalised help, whether or not strategic or job-specific. In addition they obtain perks reminiscent of a verified consumer badge and highlighted job posts, which stand out to high expertise and assist purchasers obtain outcomes.

Upwork Enterprise: Designed to serve bigger purchasers with 250+ workers, Upwork enterprise consists of consolidated billing and month-to-month invoicing, a devoted staff of advisors, detailed reporting with firm insights and traits to allow purchasers to rent quicker and extra efficiently, and the chance for purchasers to onboard pre-existing unbiased expertise onto our work market

Upwork Payroll: Upwork payroll is a service accessible to purchasers after they select to work with expertise they have interaction by way of Upwork as workers. With Upwork Payroll, purchasers have entry to third-party staffing suppliers to make use of their staff in order that they will meet their expertise wants by way of our work market.

Throughout the Managed Providers section, accounting for 8% of whole income, Upwork engages staff immediately on behalf of its purchasers, claiming duty for invoicing and high quality of labor.

Hybrid Mannequin Offers an Benefit

One of many nice points of UPWK’s enterprise mannequin is that it considers itself a hybrid between a gig firm and a standard staffing company. By tackling each ends of the spectrum, the enterprise caters each to enterprises, SMBs, and people searching for freelancers.

Knowledge from Intuit (INTU) owned Mint exhibits that half of the freelancers work 30-50 hours per week, just like a full-time position. As soon as a easy gateway for smaller firms to rent momentary staff, Upwork now works with Fortune 100 companies inside its enterprise section. In response to information from Fortune itself, 30% of Fortune 500 firms rent by way of varied freelancing platforms like Upwork.

Opposite to competitor Fiverr, which is concentrated on one-time jobs, Upwork purchasers really publish jobs on the platform and “recruit” or “invite” certified expertise.

As distant and versatile working association tradition continues to prevail in a post-pandemic surroundings, companies proceed to extend the usage of freelancers inside their organizations. Thus, Upwork’s hybrid mannequin higher poises the corporate to profit from sturdy progress inside the enterprise section. The enterprise mannequin permits Upwork to be extra agile in serving clients throughout all its segments. As acknowledged in UPWK’s investor presentation and within the picture above “a platform whenever you need it – folks when you do not”.

Within the first quarter of 2022, Upwork introduced on Honeywell (HON) as a consumer.

Honeywell competes with different high firms for tech expertise, and its present sources don’t permit for flexibility in contract period—it at present can rent just for six months or extra. The leaders envision using Upwork to start out with what they name microtasks: to have the ability to have a bench of versatile expertise targeted on product innovation. We’re excited to proceed to develop our partnership with Honeywell and help its entry to the on-demand, specialised consultants it must scale product innovation.

UPWK onboarded 32 new enterprise purchasers within the first quarter alone, together with Reddit and World Funds (GPN).

Unit Economics & Capital-Mild Enterprise Mannequin

As beforehand talked about, UPWK is the market chief by way of GSV, or gross service quantity. Its capital-light enterprise mannequin is one other enticing enterprise high quality of UPWK. As a market enterprise with extraordinarily low COGS, Upwork’s distinctive unit economics drive high-margin income as exemplified by the chart under.

With a long-term gross revenue goal of 85% and Adjusted EBITDA margin of 35%, the long-term profitability and cash-generating potential of Upwork can considerably reward shareholders over the long run.

Stickiness Driving Community Results

Outlined as a buyer’s propensity to make use of a services or products extra often, stickiness is a key trait that demonstrates power in market and social media enterprise fashions. In December of 2005, Meta Platforms (META) boasted a whopping 6 million DAUs (each day energetic customers). In its most up-to-date fiscal yr, the corporate boasted a whopping 1.93 billion DAUs, a 300-fold improve in 17 years. The logic behind this was easy: folks beloved utilizing Fb as a result of the platform was sticky and it stored clients coming again. As soon as a easy Harvard inner web site to attach college students is now a multi-billion social media large that many might argue they can’t dwell with out. To make clear, I’m not arguing that UPWK will ever acknowledge the dimensions and scale of Meta, however slightly the significance of getting a sticky services or products.

Upwork’s stickiness has been confirmed over the past 10 quarters. The dual engines driving UPWK’s progress are the variety of purchasers and whole GSV per consumer.

Over the previous 13 quarters, UPWK GSV per energetic consumer has grown at a really wholesome 32% regardless of the consecutive quarterly declines in the course of the starting of COVID in 2020. Moreover, Upwork continues to see sturdy progress in whole energetic purchasers, up 55% from 2019. With spend per consumer and whole consumer progress supercharging Upwork’s high line, it’s evident that the corporate is the direct beneficiary of community results as purchasers and expertise discover worth in its platform.

Upwork’s stickiness leads to a moat derived by way of a community impact, in that the extra customers it has, the extra worth is acknowledged from the product. As Upwork continues so as to add worth throughout all enterprise channels, each purchasers and freelancers will develop into reliant on the platform as both a supply of revenue or the perfect place to seek out international expertise. Whereas it could take time for this to translate into distinctive financials and economics, UPWK’s long-term goal is to increase its take price. As an organization within the early phases of benefiting from the gig financial system, the near-term focus continues to revolve round sturdy product integration, rising its consumer base, and growing its trade share of pockets.

Financials

Over time, Upwork has exemplified sturdy top-line progress as a enterprise and throughout all of its channels. Regardless of top-line progress, Upwork is but to attain favorable economics as OPEX continues to develop with income, negatively impacting profitability.

The desk under depicts OPEX as a share of income.

Whereas web revenue for the earlier fiscal yr got here in at -$56.24 million, UPWK did generate $10 million in working money move. However, the corporate does rely upon funding, and per its 10-Okay, issued $575 million in unsecured senior notes payable in August 2026.

Moreover, it’s prudent for traders to acknowledge the growing share depend that may possible dilute shareholders. Whereas that is regular for firms consistently reinvesting into progress initiatives and having to boost capital, traders should not count on share buybacks any time quickly.

Competitors

Upwork’s pure-play public competitor is Fiverr, one other firm making the most of the gig financial system market tailwinds. Nonetheless, as talked about above, Fiverr’s focus is extra on one-time jobs whereas Upwork has a foot in each camps. The desk under depicts some key metrics evaluating the 2 companies.

With comparable valuations, Fiverr’s take price is greater than double UPWK’s. Nonetheless, Upwork’s rationale for the decrease take is because of greater volumes from Enterprise purchasers, leading to decrease take charges. Whereas this may occasionally pose a trigger for concern, 13.2% continues to be a wholesome take price that may be elevated sooner or later as UPWK strengthens its moat and grows its market share.

Naturally, as UPWK purchasers and expertise acknowledge extra worth from the platform, it should have the leverage to extend its charges and take price. Firms reminiscent of Amazon (AMZN) and ETSY (ETSY) are key examples of platform-focused firms that repeatedly improve charges as customers develop into reliant on the platform. In a current article of mine on Etsy, I speak about its most up-to-date charge improve and the way it resulted in zero churn.

Moreover, there are threats from new entrants within the personal markets together with Toptal, Jooble, Freelancer.com, and Guru. Whereas Upwork’s dominance stays intact, it should not relaxation on its laurels if it needs to uphold its sturdy aggressive place.

Last Ideas

All in all, Upwork is an outstanding enterprise benefiting from community results and secular tailwinds pushed by progress within the gig financial system. Its stickiness proves that it’s really offering a superb answer for its clients, exhibiting sturdy progress in each GSV and spend per consumer.

Down 64% over a 1-year interval with an inexpensive 4x P/S a number of, Upwork’s sticky enterprise mannequin and enticing economics make it a superb addition to at least one’s portfolio. With the valuation considerably compressing following the tech sector sell-off, I imagine Upwork offers vital upside for shareholders at as we speak’s costs.