Pre-IPO Coverage: Upwork (UPWK)

Figure 1: Comparison: UPWK vs. EBAY

Sources: New Constructs, LLC and company filings 

UPWK investors must believe that, as it grows, economies of scale can improve its profitability. In particular, the company may at some point become large enough where it becomes economical to build their own server farms rather than use Amazon Web Services (AMZN), which could significantly improve gross margin.

On the other hand, UPWK may not be able to sustain the 12.9% of Gross Services Volume that it collects in fees. The company’s fee percentage is smaller for clients that spend larger amounts on a single freelancer, so as UPWK tries to attract larger enterprise clients it may see its fee percentage decrease.

Highlighting Reasons for Optimism

There are a few reasons to be optimistic that UPWK can improve its profitability and grow into its valuation, including:

  • Accelerating Growth: UPWK’s year-over-year revenue growth improved from 23% in 2017 to 28% through the first six months of 2018, and its core client growth improved from 13% to 22%.
  • Client Spend Retention: Not only is UPWK attracting new clients, it’s generating more value from existing clients. Through the first six months of 2018, its client spend retention rate was 106%, which meant existing clients spent 6% more than they did in the first six months of 2017.
  • Positive Free Cash Flow: We don’t have enough data to calculate free cash flow on a TTM basis, but in 2017 UPWK earned $5 million in free cash flow. This positive free cash flow, combined with a fairly small debt burden, means investors shouldn’t need to worry about liquidity.
  • No Dual-Class Shares: Unlike many other recent IPO’s, UPWK doesn’t have a dual-class share structure. Public investors get the say in corporate governance they deserve.

Causes for Concern Still Exist

Despite the positives, there are many red flags and challenges facing UPWK as well. For the company to justify its valuation, it will need to overcome:

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Disclosure: David Trainer, Kyle Guske II, and Sam McBride receive no compensation to write about any specific stock, style, or theme.

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Dallas Carr 2 years ago Member's comment

With the strong financial system and the flying stock market, some researchers predict that 2019 will be a good year for IPOs. There will be many big companies going public and investors will get the opportunity to invest in their stock. Upwork is one among them that got funding rounds and must have capability to repay their investors.