UPWK - Upwork: Weakness Priced In Outperformance Ahead

2023-09-22 08:00:00 ET

Summary

• We initiate our Upwork coverage with a buy rating as we think current macro headwinds have been priced into the stock.
• We are constructive on management's focus on operating expenses reduction and margins expansion.
• The gig economy is estimated to grow at a 16% CAGR to $873B by 2028, and we think Upwork is uniquely positioned to capture a significant portion of the market.
• Management guided higher for FY23 to 8% YoY growth, outpacing its peer group growth at 6-8%.
• We think Upwork can meaningfully outperform its peer group in 2024 and grow its bottom line faster than topline.

We're initiating Upwork ( UPWK ) with a buy. Upwork is an online marketplace that revolutionized how talented professionals and businesses collaborate. The platform connects clients with various freelancers, offering a vast range of specialized skills and services. With its intuitive tools and services, Upwork empowers businesses to achieve their goals and freelancers to expand their careers, all while redefining the traditional boundaries of work. The gig economy, in which the company operates, is estimated to grow at 16% CAGR to $873B by 2028; we think Upwork is uniquely positioned to capture a significant portion of the market and see this driving financial outperformance into 2024.

Last quarter , the value of all the work done by freelancers for clients on Upwork, in other words, the company's Gross Service Value, or GSV, again exceeded the $1B mark. Upwork's share of that GSV generated $169M in revenue, up 7% Y/Y. Furthermore, the GSV per client is increasing Y/Y. While Upwork's growth of new active clients has slowed in the first half of FY23, we now expect the slower growth to have been priced into the outlook for the next quarter and see more traction on the platform as macro headwinds ease into 2024. Below is a graph detailing the growth in GSV per active client.

We understand investor concern over slowed sequential growth in GSV due to softer spending on the platform and macro headwinds, but we think this weakness has been priced into the stock. The stock is up 17% YTD, relatively in with the S&P 500, up 16%. The stock is down over 7% today alone, underperforming the S&P 500 by 5%. The following graph outlines the stock's performance against the S&P 500 YTD.

Management now guides 3Q23 revenue in the range of $165-$170B, with adjusted EBITDA in the range of $14M to $17M. We think the macro weakness has been priced into the outlook for the next quarter. For FY23, Upwork forecasts revenue and adjusted EBITDA to be $665-$675M and $50-$55M, respectively. We're optimistic about management's emphasis on managing operating expenses and driving margin expansion in FY23. We think the cost-conscious approach shows Upwork's commitment to financial prudence and sustainable growth through operating expenses; the company aims to enhance operating efficiency, minimize unnecessary costs, and diligently allocate resources. This quarter, Upwork achieved a notable milestone by increasing its gross profit margin by two full percentage points, reaching 76%, while significantly reducing its operating expenditure as a percentage of revenue, bringing it down ten percentage points. We think management's discipline in operating expenses and simultaneous restructuring of fees will edge the company closer to achieving profitability.

Since March, Upwork has redesigned its profit-shared business model by replacing the traditional bracket fee step ladder structure with a flat fee of 10% on its product offerings, including Upwork Basic, Upwork Plus, Upwork Business, Upwork Enterprise, and Upwork Payroll. Management guides for FY23 8% Y/Y growth outpacing its peer group growth at 6-8%. We expect the stock to outperform the peer group in the mid-to-long run and see attractive entry points at current levels.

Valuation

Upwork is currently trading at Enterprise Value to Sales CY2024 at 1.8x versus the peer group average at 3.0x. On a price-to-earnings basis, the stock is trading on a CY2024 at a multiple of 18.0 compared to the peer group average at 42.2x. From a valuation standpoint, we believe Upwork is currently undervalued, and investors should look for favorable entry points once sell-offs arise. The below outlines Upwork's valuation compared to its peers using Refinitiv data.

Word on Wall Street

Wall Street shares our bullish sentiment. More than six sell-side analysts are buy-rated on the stock, zero are sell-rated, and four are hold-rated. To calculate upside potential, we use Wall Street's median price target of $15 to get a 29% upside and 23% using the mean price target of $14.

Below is the table to help you better understand Wall Street's stance on the stock.

What to do with the stock

We initiate Upwork with a buy as we think macro headwinds have been priced into the stock. We have a positive outlook on the company's strategic focus on reducing operating expenses and expanding margins, improving financial health. With the robust growth of the gig economy to an estimated staggering $873B by 2028, we think Upwork is better positioned to leverage the growth opportunity in the market into financial outperformance into 2024. With management guiding higher for FY23, we believe Upwork can outperform its peer group while growing its bottom-line faster than its top-line. We encourage investors to initiate a position in Upwork whenever the opportunity for a sell-off arises.

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