Upwork (UPWK) is a gig economy platform that bridges the gap between companies looking to hire independent talent and freelancers seeking remote work on a contract basis. The stock has been under pressure for some time now and is down nearly 33% for the year due to some short-term macro challenges and concerns about AI eating freelancers’ lunch.
I do not believe the macro challenges will persist for long. In my opinion, Upwork’s growth story will play out over the next several quarters as the company continues to improve its unit economics and gain traction in the gig economy. As for AI replacing freelancers, I believe the bears’ concerns are overblown. Upwork is a high-quality growth story that’s currently on sale.
I am bullish on Upwork because of its lucrative business model, improving profitability, and key enabler status in the gig economy.
Upwork’s Lucrative Business Model
A prime reason for my bullish position relies on Upwork’s business model, which I appreciate and find highly lucrative. As I said earlier, Upwork connects people who sell services to businesses who buy services. For every transaction on its platform, Upwork charges a fee, similar to the fee that Airbnb (ABNB) charges for every time a person is booking on its platform or the fee that Uber (UBER) charges for every trip on its platform. Therefore, Upwork’s marketplace model is time-tested and extremely profitable, especially at scale.
Moreover, Upwork’s model is getting even more profitable every quarter, and the company still has a lot of room to grow its already steadily growing take rate. The take rate is a metric representing the percentage of each transaction a platform business charges as a fee.
In Q2 2024, Upwork’s Take Rate improved by 290 basis points year-over-year to 19.2%. This number has room to grow to catch up to its rival Fiverr’s (FVRR) take rate, which was logged at 33% in Q2 2024.
Additionally, a high take rate coupled with a growth in active clients and users is a recipe for margin expansion. In Q2 2024, Upwork’s Active Clients grew 6% year-over-year to 868,000. This metric represents a buyer of services that have spent activity on the platform for 12 months to the measurement date.
Now, let’s talk about profitability.
What I Like About Upwork
I hunt for companies that report improvements in profitability, and Upwork has been posting strong bottom-line numbers for several quarters now. In Q2 2024, the company flipped a net loss of $4 million from a year ago to net income of $22.2 million. Upwork’s gross margins improved 100 basis points year-over-year to 77%, further reinforcing my take on Upwork’s lucrative business model.
Two additional things I love about the stock as a bull are Upwork’s cash generation and buying back shares. The company ended the quarter with $33.5 million in free cash flow on revenue of $193.1 million (+15% year-over-year). Also, Upwork completed a $100-million share buyback program during the quarter, repurchasing 2.9 million shares, and has repurchased 8.2 million shares in 2024.
You do not have to be a financial guru to identify a growing business that still has a lot of room to run, just like Upwork. The company is growing sales, improving profitability, and creating shareholder value.
Additionally, Upwork is part of a market that will grow significantly due to secular structural changes. People love the flexibility and balance of remote work and freelancing, a modern development that Upwork solves. Upwork’s platform is available in 180 countries worldwide, yet it doesn’t even have a billion people using it yet. I see remote work, gig work, and solopreneurship as the next big thing in the next ten years, and Upwork is best positioned to enable this major structural change.
Why Is the Stock Down Then?
As I alluded to above, there are two reasons why Upwork stock is down so much: concerns about AI disrupting freelance work and macro challenges, including a slowdown in business spending due to high interest rates.
First, the AI problem, which, by the way, is not even a problem but rather a driver. AI and automation might replace some freelance jobs but are also propping up new jobs. The Gross Services Volume (GSV) for AI-related work on Upwork’s platform grew 67% year-over-year in Q2 2024. Simply put, people are turning to Upwork to offer AI-related services, and businesses are hiring AI talent.
Moreover, freelancers who completed AI-related jobs on Upwork’s platform made 47% more per hour than those who did non-AI-related work in the second quarter. Some of the most popular jobs included data annotation, prompt engineering, and building and deploying generative AI apps.
So, AI certainly isn’t bad for Upwork, and the company is investing in the technology to make itself the platform of choice for AI talent and AI gigs. Upwork recently launched Uma, its mindful AI, helping freelancers and businesses leverage AI to write better proposals or find the right person for the job. AI only expedites processes and makes the platform productive for everyone.
Now, coming to the macro challenges, the Fed held rates higher for longer, which put pressure on businesses. However, we will see the first cut in this cycle at the FOMC meeting in September. It’s ironic because September has historically been the worst month for the markets, but this September might be one of the best.
UPWK’s Cheap Valuation
The last factor for my bullish sentiment stems from Upwork’s cheap valuation. I believe bears’ concerns are overblown and unwarranted, and Upwork is currently unreasonably cheap. UPWK is trading at 10.4 times its 2024 earnings estimates. That’s a 48% discount to its sector and a 97.5% discount to its 5-year historical average.
Moreover, analysts expect earnings to grow by 79% this year and a further 15% next year. If investors assign Upwork stock a P/E multiple of 20 (the sector’s median), it will double next year.
Analysts’ Take on UPWK Stock
On the Street, UPWK stock has a consensus Moderate Buy rating based on 6 Buy recommendations and 3 Hold recommendations. The average price target of $17.33 represents an upside of 79.77% from current levels.
The Bottom Line on UPWK
Upwork is a high-quality company with a profitable business model set to grow meaningfully as the gig economy gains traction. I remain bullish on the company and believe it’s a superb long-term investment at a wonderful price in this moment in time.
