Summary
- Today, we take a look at Upwork, which just posted fourth quarter earnings results after the bell on Wednesday.
- The company should continue to benefit from the explosion in the virtual workforce over the long term but faces some macroeconomic challenges in 2023.
- Which way will the stock go from here? An investment analysis follows in the paragraphs below.
All happiness depends on courage and work .”? Honoré de Balzac
Today, we put Upwork Inc. ( UPWK ) in the spotlight. It has been a wild ride for shareholders since the company came public nearly five years ago, with the equity providing a round trip since its debut. The company reported fourth quarter earnings after the bell on Wednesday providing a fresh set of data points. An analysis follows below.
Company Overview:
Upwork Inc. is headquartered in Santa Clara, CA. The company has developed and operates work marketplace that connects businesses with various independent professionals and agencies.
This platform provides access to talent with various skills such as sales and marketing, customer service, data science and analytics, design and creative, web, mobile, and software development, etc. This marketplace also enables customers to streamline workflows, such as talent sourcing, outreach, and contracting. This company was previously known as Elance before changing its name to Upwork in 2015. The stock currently trades around $14.00 a share and sports an approximate market capitalization of $1.8 billion.
Fourth Quarter Results:
Yesterday, Upwork posted its fourth quarter numbers . The company had a non-GAAP profit of four cents a share, seven cents above the consensus. Revenues rose 18% on a year-over-year basis to nearly $161.5 million, slightly above expectations. Non-GAAP gross profit rose to 75% of overall revenues from 73% in the prior year period. Adjusted EBITDA income was a positive $1.1 million, a negative adjusted EBITDA of $3.3 million.
Unfortunately for shareholders, these numbers are probably the best they will see in a while. Management reduced first-quarter 2023 revenue guidance to between $157 million and $160 million. This would be a 12% year-over-year increase at the midpoint but down significantly from the growth achieved within Upwork's just posted fourth quarter results. Leadership also projected, FY sales between $690 million and $705 million. This would be 13% year-over-year growth at the midpoint. Expectations from the analyst community called for a consensus of 17% sales growth for the upcoming fiscal year when this guidance was just lowered. Management stated it was lowering guidance because of ' current macroeconomic environment and related trends in our business '. Finally, management sees an adjusted EBITDA loss of between $8 million and $11 million in 1Q2023 but does expect positive adjusted EBITDA for the full fiscal year.
Analyst Commentary & Balance Sheet:
Over the past three months, all after third quarter results, eight analyst firms including Citigroup and Needham have reiterated Buy/Outperform ratings on the stock. Of note, roughly half had downward price target revisions. Price targets proffered ranged from $14 to $24 a share. RBC Capital chose to maintain its Hold rating and $15 price target.
So far three analyst firms have maintained Buy ratings on UPWK since fourth quarter earnings posted with price targets in the $17 to $18 range.
Approximately four percent of the outstanding float in the shares is currently held short. Insiders were frequent but generally small sellers of the shares throughout 2022. Several sold just over $700,000 worth of shares collectively in the fourth quarter. One insider sold just over $3,000 worth of equity in January in the only insider transaction so far in 2023.
Upwork ended the third quarter with approximately $675 million in cash and marketable securities against just over $560 million in long-term debt. Fourth quarter data points are not available yet but should be similar.
Verdict:
The current analyst firm consensus prior to fourth quarter numbers posting had the company losing 12 cents a share in FY2022 as revenues rise just over 22% to $616 million. They projected Upwork will break into the black barely in FY2023 on sales growth in the high teens. Obviously, those 2023 projections will be adjusted over the coming days and weeks, based on new management guidance.
I think Upwork is a canary in the coal mine when it comes to the U.S. jobs market. While we saw a blowout January BLS Jobs report to start off February, it is important to keep in mind a few things. First, the unemployment rate is always a lagging economic indicator. Second, there were myriad ' seasonal' and annual adjustments within this jobs report. In addition, the 517,000 jobs created were nearly five times as many as were in the January ADP Jobs report that came out two days prior. Finally, there has been huge uptick in layoff announcements over the past couple of months, especially in technology. This will likely be a major headwind to Upwork for the most if not all of 2023.
I took a small position via covered call orders late last year when the stock was near a 52-week low around ten bucks a share. That position is trending to expiring in the money in mid-April. Upwork is a well-run company that should continue to benefit over the long term from the explosion in the virtual workforce.
That said, the company faces increasing macroeconomic challenges in the quarters ahead as the Federal Reserve tries to engineered a ' soft landing '. Upwork is also unlikely to profitable now until FY2024. If the stock retests the $10 area again, I will probably add a few shares to my stake in the company. However, I am not increasing my holdings here at these levels as the company navigates through an increasingly uncertain economy.
Without ambition one starts nothing. Without work one finishes nothing. The prize will not be sent to you. You have to win it. ”? Ralph Waldo Emerson
For further details see:
Upwork: Facing Increasing Macroeconomic Challenges