UPWORK INC ANALYSIS

Summary

Upwork (UWPK) is a leading online talent marketplace. The business experienced explosive growth over the course of the COVID-19 pandemic, but in 2023 began a pivot to profitability that has quickly and significantly improved the company’s margins. Concerns about the long-term impacts of artificial intelligence have pressured valuation and created an attractive entry point for a business that has the potential to double adjusted EBITDA by 2028.

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Business Description

UPWK operates a leading marketplace that connects companies with global talent. The company primarily facilitates offshoring of work in categories including software development, design, and writing; nearly ~70% of gross services value (“GSV”) enabled through the platform in fiscal 2023 originated from US clients, while just ~26% of GSV was completed by US-based talent (source: 2023 10-K). A typical UPWK project might span several days to a few weeks—larger than project or catalog-based marketplaces like Fiverr and 99Designs, but shorter than mandates given to traditional staffing firms. It’s our understanding that around half of UPWK traffic arrives at the site organically.

Like many marketplace models, UPWK generates fees from both client job posters (5-10% take rate, or higher for large enterprise) and talent (10% flat take rate), which together conspired to facilitate a ~17% average marketplace take rate as a percentage of GSV over the last 12 months (source: company website and quarterly filings for the LTM period ending Sept 30, 2024).

UPWK’s long tail of customers are small, but loyal. Based on 3Q24 LTM revenue, GSV, and client count disclosures in company filings and presentations, we estimate that the average disclosed marketplace client completes just ~$4,400 of marketplace GSV and generates just under ~$800 worth of revenue for UPWK. Importantly, despite the project-based nature of UPWK marketplace work, client spend has proven quite sticky from year to year, particularly for client cohorts who signed up before the pandemic.

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Client Spend by Annual Client Cohort

Source: UPWK 2023 10-K

UPWK’s Recent History

UPWK experienced explosive growth over the course of the COVID-19 pandemic, facilitated by both tight labor market conditions and increasing talent interest in remote work options. Marketplace GSV rose more than 20% in 2020 and over 40% in 2021, supported by both new clients and an increase in spend per client (source: UPWK quarterly filings). More recently, however spending on the UPWK platform has stalled as labor market conditions have loosened and undoubtedly some categories—eg. design-related work—have been impacted by increasingly proficient artificial intelligence (“AI”) models.

The potential for AI to obviate the need to send work to lower cost, more flexible jurisdictions is the bear case for UPWK shares, and we believe, the primary motivator for the company’s depressed multiple relative to potential earnings power. We note that software development/IT, writing & translation, and design & creative rank among the most posted jobs on the UPWK talent marketplace, and much of the work in these areas has the potential to be greatly aided or displaced by AI-powered tools (source: company website). At the same time, AI has had seemingly little negative impact to date: flagship AI model ChatGPT was released more than two years ago, and based on the company’s client cohort disclosure, as shown above, we think recent weakness has primarily emanated from a moderation in spend amongst the very large cohorts that joined UPWK during the pandemic when labor availability was exceptionally tight. It does not seem evident that AI/ChatGPT are having a material impact on UPWK’s business. Going forward, we think secular growth in offshoring in durable verticals (eg. finance, marketing) and growth in AI-proficient experts could help to offset declines in more exposed verticals like translation, driving a potentially more stable top line than the stock is discounting.

While a reacceleration in GSV growth would be helpful to our thesis, we do not expect a return to the halcyon days of double-digit growth. We think for the stock to work, UPWK’s marketplace simply needs to remain vibrant and around today’s size as the company executes against a profitability agenda.

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Closing the loop on marketplace revenue, we note that take marketplace take rates were stable in the ~13% context for years before a talent-side pricing change in 2023 (source: 2023 10-K). Going forward, we expect more limited improvement in take rates from more recent ~18% levels (source: 3Q24 investor presentation), but see potential upside over the intermediate-to-long term from efforts like advertising and subscriptions (which UPWK includes in take rate).

UPWK GSV

Source: UPWK quarterly and annual filings

UPWK Active Clients and GSV per Client

Source: UPWK quarterly and annual filings

Separate and apart from the talent marketplace, we note that UPWK generates a relatively small share of sales from enterprise relationships with additional features, as well as outcome-based managed services.

UPWK’s Strategic Pivot to Profitability

Like many high-growth companies, UPWK scaled investments in R&D, product, and sales during this exciting period. As growth slowed, however, we think the core talent marketplace’s underlying margin potential was obfuscated by the trappings of pandemic-era excitement. Recent headcount reductions support this view, and management clearly believes in UPWK’s margin potential, as evidenced by their 35% adj. EBITDA margin target (source: UPWK 3Q24 earnings call).

UPWK Adj. EBITDA Margin (%)

Source: UPWK quarterly and annual filings

Summarizing the Investment Thesis

To summarize, with shares hovering around $16 or ~9.5x EBITDA, we think investors are overly distracted by AI risks that haven’t discernibly materialized in top-line growth to date, and are therefore missing a potential doubling of adj. EBITDA by 2028 as the company executes against its margin self-help story. Assuming modest top-line growth and margins scaling to 35%+, adj. EBITDA could surpass $300MM by 2028 for a business with a current enterprise value of just $1.9Bn. We believe management is both incentivized to pursue this transition, and, as evidenced by results over the last two years, highly capable of doing so.

Risks

AI: Many UPWK projects are for writing, design, coding, or other work that could be displaced in whole or part by AI-powered tools

Competition: UPWK competes with both project-based sites like 99Designs/Fiverr, as well as more traditional staffing firms

Employment markets: During softening job markets, employers typically first reduce spend on contract or project-based work before right-sizing their full-time labor force