Pre-IPO Coverage: Upwork (UPWK)

  • Expenses Growing Faster than Revenue: If UPWK wants to grow into profitability, it needs to rein in its expense growth. Through the first six months of 2018, revenue grew 28% year-over-year, but cost of revenue grew 29%, general and administrative costs grew 36%, and sales and marketing grew 52%.
  • Significant Competition: UPWK faces competition to become the dominant platform for hiring freelancers. Notable competitors include fellow startup Fiverr – which gets superior reviews compared to UPWK from freelancers – and Microsoft’s (MSFT) LinkedIn ProFinder.
  • Small Market: As we’ve argued before, the gig economy is overhyped. A recent survey from the Bureau of Labor Statistics showed that just 1% of U.S. workers work through online platforms, and of those ~20% are in transportation (i.e. Uber and Lyft drivers). The number of online freelancers is simply not that large.

Our Discounted Cash Flow Model Shows UPWK Is Slightly Overvalued

Our dynamic DCF model shows that the future cash flow expectations baked into UPWK’s valuation are optimistic, but not impossible.

To justify the midpoint of its IPO range at $13/share, UPWK must immediately achieve 8% NOPAT margins – halfway between its current margin and EBAY’s – and grow revenue by 21% compounded annually for 12 years. See the math behind this dynamic DCF scenario.

To achieve that level of sustained revenue growth, UPWK would likely need to obtain a dominant share of the online freelancer market. If competition slows its growth even slightly, the stock has significant downside. If UPWK earns the same margins as the scenario above but only grows revenue by 15% compounded annually for 10 years, the stock is worth just $5/share today, a 58% downside. See the math behind this dynamic DCF scenario.

Additionally, UPWK could be an acquisition target down the road. Potential acquirers could include Microsoft, should LinkedIn ProFinder fail to gain traction, Fiverr, if it wants to consolidate through acquisitions, or traditional staffing agencies that want to jumpstart their entry into the freelance market.

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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.