Upwork Earnings: Poised For Positive FCF, Stock Surges (NASDAQ:UPWK)

Rapid Call

A couple of months back in my prior analysis on Upwork (NASDAQ:UPWK), I stated,

[…] from the highs set in the past 12 months, this stock has fallen by more than 60%. Yes, there are plenty of issues facing Upwork. I will not declare otherwise. But what I will say is, how much of that bad news isn’t already priced in?

I make the case that paying approximately 11x forward EBITDA for Upwork provides investors with an enticing risk-reward profile.

I then went onto state,

On the surface, I would have presumed that Upwork would have been slightly more immune to an economic downturn than Fiverr International Ltd. (FVRR), since Upwork’s business predominantly targets larger enterprises and more of a recurring collaboration rather than small one-off tasks, typically associated with the vulnerable SMB (small and medium-sized business) part of the market.

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

Why Upwork? Why Now?

As indicated in the introduction, both Upwork and Fiverr are freelancing platforms. However, the one distinguishing aspect between Upwork and Fiverr is that Upwork typically targets larger enterprises.

Furthermore, in my previous analysis, I described Upwork’s strategy to focus on delivering more value to customers via a simpler fee structure. Here’s a highlight from my previous analysis.

And what’s even more interesting, is that Upwork’s newly updated terms call for a flat 10% take rate which is indeed quite low, particularly when compared to Fiverr’s, which is about 3 times higher.

Despite my skepticism over Upwork’s strategy to reduce their take rates, this strategy has started to pay off. And this quarter we saw a reversal in the y/y decline in enterprise revenue, see below.

After reporting numerous quarters of declining enterprise revenue growth rates, it looks like Q1 marked the trough quarter. Here’s a quote from the earnings call that echoes this insight

We are raising our revenue guidance primarily due to the success of our simplified pricing structure and other platform monetization improvement.

With this quote and context in mind, let’s turn our focus to Upwork’s outlook.

Upworks Outlook is Revised Higher

Upwork revised higher its full-year 2023 guidance by 100 basis points from 7% at the midpoint to 8% at the midpoint.

Keep in mind that this is a company that has delivered decelerating revenue growth rates over the past 4 quarters. Indeed, this time last year, investors were still thinking of Upwork as a mid-20s% CAGR business. Little did they know at the time that twelve months on, investors would be saluting 8% y/y growth rates. And yet, here we are.

All that being said, Upwork has a history of beating revenue estimates. Meaning that, even though the outlook for Q3 points to approximately 7%, investors are hoping that management is being conservative with its guidance and that perhaps Upwork can end up delivering revenues that can come within a sliver of 10% CAGR rates.

Moreover, looking ahead to 2024, given this much easier set of comparable figures, there’s every likelihood that Upwork could end up delivering close to low-to-mid-10s% CAGR.

Consequently, this means that analysts’ estimates above are now due to be upwards revised in the coming hours and days. This leaves the stock in an attractive place, particularly given Upwork’s attractive valuation – the topic that we’ll discuss next.

UPWK Stock Valuation — 11x EBITDA

In my previous analysis, I described why I believed that Upwork could report $110 million of EBITDA in 2024. And indeed, management reaffirmed that Q4 could see Upwork exiting 2023 with around 15% EBITDA margins.

Hence, given Upwork’s recently found momentum, I believe that my estimated EBITDA figure is very much achievable or even surpassable.

Furthermore, Upwork declares that on a go-forward basis, the business will be free cash flow positive. Given that Upwork has around $150 million of net cash and is expected to be free cash flow positive, this leaves Upwork’s 11x forward EBITDA valuation in a very attractive spot.

The Bottom Line

In my previous analysis, I highlighted Upwork’s stock decline of over 60% in the past 12 months, acknowledging the challenges the company faces.

However, I made the case that the current price of approximately 11x forward EBITDA presents an enticing risk-reward opportunity.

Upwork’s focus on larger enterprises and its strategy to deliver more value through a simplified fee structure, with a flat 10% take rate, has shown promising results, especially in reversing the decline in enterprise revenue.

The company raised its full-year 2023 revenue guidance to 8% growth at the midpoint, and there is optimism that future estimates might be revised upwards given the potential for even better performance. With the prospect of becoming free cash flow positive and an attractive valuation of 11x forward EBITDA, I remain bullish on Upwork’s outlook and believe it presents a compelling investment opportunity.