Summary
- Upwork reported a solid quarter with revenues beating analyst estimates and growing at an impressive 18% clip.
- The freelance platform didn't guide to the most impressive 2023 growth rate, but Upwork growing sales at 13% is solid for the macro weakness.
- The stock is cheap at only 2x forward sales while the company forecasts being profitable in '23.
As with most tech related businesses, Upwork ( UPWK ) trades at the lows of the last few years. The company saw an initial work from home boost in demand for freelance work, but Upwork has now been hit by budget cuts reducing demand for part-time work following impacts from the war in Ukraine. My investment thesis is ultra Bullish on the stock trading at a depressed valuation multiple.
Macro Woes
Upwork is an appealing business model due to the consistent growth rates as the company constantly adds customers and freelance workers to the platform. In addition, the management team is building out the platform with new features with the latest offering including the path to full-time hiring of freelance workers.
For Q4'22, Upwork reported revenues grew 18.0% to a record $161.4 million. The company has seen revenue growth rates slow over the last year with the peak growth rate of 42% trending down to a target of just 12% for Q1'23.
In no surprise, the freelance platform is facing macro issues causing customers to reign in spending on new work assignments, even if the benefit of working with contract workers is the ability to not fully commit to hiring full-time employees. On the Q4'22 earnings call , CEO Hayden Brown discussed contracts pushing into the current quarter:
And our view is, talking to customers, that a lot of them in Q4 and coming into Q1 have really been reevaluating budgets, looking at their spend levels kind of based on the macro uncertainty ahead, and that showed up with things like elongated deals and things getting pushed for some customers from Q4 to Q1.
The customers on the platform continue to expand spending with GSV per Active Client increasing 10% YoY to $5,045 in Q4'22, crossing the $5,000 threshold for the first time. Upwork continues driving existing clients to spend more, including increasing the take rate, with the issue with overall sales growth being the slowdown in new Active Clients. While Enterprise Clients grew in the quarter, the company saw Active Clients dip 1% in Q4 to 816,000.
Return To Profits
The best part of the current macro climate is that Upwork can reign in some of the aggressive spending in the prior year. The company originally set out to spend aggressively on marketing in order to improve brand awareness.
Upwork plans to still spend $15 million on brand marketing for Q1'23. At this rate, the freelance platform will spend up to 10% of revenues on brand marketing alone during a tough macro climate.
The company was slightly adjusted EBITDA profitable in Q4'22 and the entirety of the Q1'23 guided loss could be wiped out with a reduction in brand marketing. Upwork forecasts a $10 million EBITDA loss to start the year, but the company predicts returning to solid adjusted EBITDA profits for the 2H of the year. The guidance for the full year is up to $20 million of EBITDA profits leading to a non-GAAP EPS of up to $0.13 compared to analyst estimates at only $0.03.
The return to profitable results is a promising step considering the tough macro environment. The ability of the freelance platform to generate strong leverage on only 13% sales growth should impress the market. In addition, Upwork just beat the Q4'22 revenue estimates by $2.2 million in a sign of how the company could easily sail past the targeted growth rates of only 13%.
The stock ended down nearly 8% in after-hours trading providing an interesting opportunity to buy a growth story on a dip close to the lows. The market cap slips to only $1.6 billion with a 2023 revenue target of $700 million while a return to 20% growth rates pushes 2024 revenues towards $840 million.
The incredible part of the investment story is that Upwork was snapped up at $60 when the market cap would've been closer to $8 billion while the actual 2021 revenues were only $503 million. Of course, the company had revenue growth pushing towards 40% at the time, but those growth rates weren't sustainable anyway. Still, the stock traded at over 16x sales targets and the potential exists for the next upcycle to produce a similar premium valuation on a much larger revenue base.
Either way, the normalized forward P/S fair value multiple is probably closer to 5x, not the current 2x. Fiverr International ( FVRR ) trades at nearly double the forward P/S ratio despite analysts only forecasting 2023 sales growth of sub-9%.
Takeaway
The key investor takeaway is that Upwork isn't being given credit for maintaining solid double-digit revenue growth in a tough macro environment. As business normalizes, the stock should approach a higher P/S multiple equivalent with the one assigned to their industry peer, if not higher.
Investors should buy the dips in Upwork.
For further details see:
Upwork: Plodding Along