Description

Upwork is a $1.7B market cap that trades at 4.6x FY20E sales. The company is a dominant two-sided freelancer marketplace and benefits from what we think is a long-lived secular shift to remote/freelance working and should enjoy strong compounding for years to come. Moreover, Upwork’s take rate (~13%) is well below comps (Fiverr @ 26%) so there exists considerable pricing power as well.

Upwork is an orphaned broken IPO. Because of its size ($1.7B) it is sparsely covered by analysts and too small many institutional investors to own. With an IPO during a weak market backdrop in Oct ‘18 and lock-up expiration, shares have languished. This creates an opportunity to buy a powerful platform that should benefit from many years of strong growth ahead.

The online freelancing category today is very small relative to the TAM / opportunity that lies ahead. Upwork connects clients (increasingly larger businesses) to freelancers that have various specializations (web developers, designers, data scientists, writers, markets, etc). A client will post a project / proposal and search the platform to invite freelancers to apply for the project. The platform has several tools to help facilitate a seamless transaction (time tracking, payment, reviews, etc). Larger enterprises are increasingly finding that they can hire freelancers on Upwork to complete small projects vs. hire permanent headcount on pay expensive agencies that take large cuts. Many of the experts on Upwork are from lower cost geographies and projects can be completed with high quality for low cost. We strongly encourage you to try using the platform for a few projects. The contingent spend TAM for Upwork’s categories is somewhere between $100-200B vs. GSV of $2B. There exists ample room to grow as companies increasingly realize the strong value prop freelancing platforms offer.

Upwork formed in 2015 with the merger and rebranding of eLance and oDesk. The company is now the largest freelance marketplace in the world. As a category leading two-sided marketplace, we anticipate the superior liquidity on both sides of the platform should continue to grow and the gap vs. competitors should continue to widen. Upwork has ~5-6x the GSV as their next closest competitor Fiverr (which has double the take rate). 

We think Upwork will be able to earn ~30%+ EBITDA long-term margins. The company has 70% gross margins and incremental revenue should flow through at very high margins. Moreover, Upwork has the ability to grow take rate which drops straight to the bottom line. Illustratively if they raised rates to Fiverr, their break-even EBITDA margins would immediately become ~13% today. Given those long-term margins, Upwork trades at 15x FY20 EBITDA or ~20x FY20 P/E using look-through margins. In our view, that is extremely cheap for a business that should be able to compound at 20%+ for many years to come. Simply put, Upwork should provide a 20%+ return (growth in intrinsic value) and any multiple re-rate can pull forward some of this return. GSV growth rates have varied a bit Q-to-Q but this is noise.

Catalyst

Continued compounding / greater market cap should attract more investors.