FVRR - Upwork Dominance: Outshines Fiverr In The Gig Economy

2023-11-21 15:36:05 ET

Summary

• Upwork Inc. and Fiverr International Ltd. are often compared as competitors in the freelance space, so we take a look at them to see which is the better stock now.
• Upwork's share price has performed better than Fiverr's, perhaps indicating it is a more promising investment.
• In a low interest rate environment, valuation is less important, but in a normalized interest rate environment, investors need to consider future cash flows and the price they are paying.

Rapid Recap

Back in August, I wrote ,

With both Upwork and Fiverr reporting in the past 24 hours, and since I called both companies' prospects accurately, I believe I'm well placed to continue to provide updated analysis on Upwork. We have much to go through, so this is why I'm bullish on Upwork

I went on to describe how Upwork Inc. (UPWK) prospects were a lot better than those of Fiverr International Ltd. (FVRR), and this is how the share prices have performed since that day.

I'll be the first to admit that getting a -2% return is far from outstanding. I know that. But at the same time, we have to keep in mind that when you are down 30% on Fiverr, you need a 43% return on the next stock just to break even.

And that's my argument right here with Upwork. When interest rates are close to 0%, you don't have to think about valuation. Everything is going up. Everyone is making money. Everyone is happy.

But in a more normalized interest rate environment, you have to think about investor expectations much more acutely. To put it more succinctly, you need to think about the company's future cash flows and how much you are paying for that.

And that's why I'm bullish on Upwork.

Upwork's Near-Term Prospects

In the near term, Upwork is poised for growth with a deliberate focus on revenue diversification and strategic goals. The company's innovative approach includes the introduction of Ads and Monetization products, such as Boosted Proposals and subscription offerings like Freelancer Plus, aimed at enhancing platform efficiency and generating additional revenue. Noteworthy is the strategic move into generative AI applications, exemplified by Upwork Chat Pro, powered by GPT-4, which provides targeted responses and recommendations to optimize project efficiency.

Strategically positioning itself as the primary hub for AI-related talent and work, Upwork has made significant strides in fostering AI-empowered independent professionals. Furthermore, the company's deepening ecosystem of partners, spanning education and technology, aligns seamlessly with its goal of creating a diverse marketplace.

That being said, let's be clear; I'm not making the argument that this is a blemish-free investment thesis. I remain acutely focused on the fact that its active clients continue to see close to no growth on a year-over-year basis.

Indeed, Upwork operates in an intensely competitive sector where the challenges are accentuated by the presence of formidable rivals. The freelance space faces stiff competition from the likes of Fiverr, but there are others too, such as Freelancer.

The sector is characterized by a constant race to attract and retain top-tier talent, which often leads to pricing pressures and erodes profit margins. After all, if the freelancer becomes big enough, why would they continue paying out of their revenues to be on Upwork? They might as well build their own website and take their clients with them.

Revenue Growth Rates Will Stabilize in 2024

Of late, Upwork has been very conservative with its guidance, see below.

This leads to believe that if we assume there's about 2% to 3% of conservatism in Upwork's Q4 guidance, it should deliver at least 11% year-over-year revenue growth.

What's more, as it enters 2024, Upwork will be up against much easier comparables, so we should expect Upwork to deliver mid-teens growth rates.

Free Cash Flow Should Increase

Upwork's Q4 EBITDA points to close to $30 million. This implies that on a go-forward run-rate, it's very likely that Upwork will be able to deliver about $120 million of EBITDA.

But to be conservative, let's presume that in 2024, Upwork will deliver about $110 million of EBITDA. This would be a more than 50% increase relative to 2023.

Given this context, I believe that paying 18x forward EBITDA for Upwork. Furthermore, even though Upwork does hold some debt, not only is the business free cash flow positive going forward, but also, its large cash position means that overall there's a net cash position of approximately $200 million or 10% of its market cap.

The Bottom Line

Upwork Inc. stands as a compelling investment choice, outshining its counterparts in the freelance space, particularly Fiverr.

With a strategic focus on revenue diversification, innovative initiatives like Ads and Monetization products, and a forward-thinking approach to AI applications, Upwork positions itself as the go-to platform for both clients and talented professionals.

Its robust ecosystem of partners and commitment to fostering AI-empowered independent professionals set it apart in a rapidly evolving market. While acknowledging the competitive landscape and the challenges presented by formidable rivals, Upwork's proactive steps and strong financial position make it a more resilient and promising investment compared to its industry peer, Fiverr.

As the company navigates through a dynamic market, its commitment to sustainable growth and adaptability makes Upwork an attractive prospect for investors seeking long-term value.

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