Upwork: Substantial Upside Opportunity In Workforce Mobility

Upwork Inc (UPWK)
Talent Sourcing - Freelance Employment

Short Term:BUY
Long Term: ACCUMULATE

First Target:$26.50
Second Target: $30.50
Third Target: $37 

Company Overview:
Virtual labor is the “next big thing” of the mobile economy and Upwork wants to be the de-facto platform. The company operates the largest freelancing website (as measured by Gross Services Volume), enabling businesses and individuals to directly hire, manage and pay for freelance labor. It also enables clients to streamline workflows, such as talent sourcing, outreach and contracting. In addition, its platform provides access to functionality for remote engagements with freelancers, including communication and collaboration in, time tracking and invoicing, and payments via escrow through its wholly owned subsidiary, Upwork Escrow Inc. Clients are able to freelance in various categories such as accounting, business support, I.T. services, personal and virtual assistance, copy edition, SEO, graphic design, web/mobile development and sales. 

The Opportunity:
Traditional methods of sourcing labor are no longer providing the human resources necessary for the fast growing tech sector, especially when labor is tight as it is now. Conversely, when the labor market slows down, many will turn to the freelance market to supplement incomes. Although too early to tell, Upwork is likely to benefit from a slowing economy as long as they are able to keep the quality of service providers up thereby keeping consumers of freelance labor satisfied with the results of their virtual workers. One key strength is the company's emphasis on highly skilled, in-demand professionals who value flexibility and prefer remote work. According to the company's third annual "Future Workforce Report", by 2028, 73% of all teams will have remote workers". More than 1 in 3 Americans will freelance this year as the freelance workforce has grown by 3.7 million to 56.7 million Americans over the past five years. (Perhaps another clue why the unemployment rate remains subdued so late in this economic expansion). According to "Freelancing in America: 2018", Americans are spending more than 1 billion hours per week freelancing, an increase of 72 million hours/week since 2015.

The Benefits:
By tapping into on-demand labor, companies are able to increase productivity by accessing specialized skills while reducing overall labor costs in the face of rapidly changing requirements that need constant re-skilling. At the same time, providers gain the flexibility to embrace an agile workforce and adapt to the future "car less" economy with the obvious benefits this would have on the environment by reducing the world's carbon footprint. 

The Trade:
UPWK is providing a compelling entry point for a long trade with a time horizon of a 6 weeks to 6 months (intermediate term hold).We use a proprietary model developed using supervised machine learning that attempts to predict shifts in sell side analyst behavior. When the model suggests consensus estimates will shift up (or down), we begin tracking analyst estimates and revisions for movement. We then breakdown ownership to understand how much of the tradable float will be affected by the analyst's revisions. The idea behind this strategy is to get in front of a "momentum ignition" in the stock powered by a series of "beat and raise" quarterly numbers, especially with a company showing substantial sequential growth, such as Upworks. 

Additional Data (from Refinitiv):

Recent Share Activity

Buyers

Value (Millions)  Shares (Millions)
FirstMark Capital, LLC $106.1 + 5.52
Harvey (Kevin R) $31.6 + 1.74
Dragoneer Investment Group, LLC $27.4 + 1.51
Citadel LLC $22 + 1.22
The Vanguard Group, Inc. $20.7 + 1.14
 
Sellers
 
Benchmark Capital Management $31.7 - 1.75
Oppenheimer Funds, Inc. $2.6 - 0.14
TimesSquare Capital Management $1.02 - 0.05
Brown (Hayden) $0.77 - 0.04
JP Morgan Asset Management $0.3 - 0.02

 

Ownership Breakdown (As of Latest Filing)

TYPE Investors % O/S Position (M Shares) Value (M USD)
Institutions 105 66.36% 70.54M 1,283.90M
    Investment Managers 99 66.34% 70.51M 1,283.37M
        Bank and Trust 3 0.08% 0.09M 1.60M
        Hedge Fund 8 1.41% 1.50M 27.16M
        Investment Advisor 52 16.76% 17.82M 322.85M
        Insurance Company 1 0.01% 0.01M 0.13M
        Pension Fund 3 0.06% 0.07M 1.22M
        Venture Capital 4 42.15% 44.80M 817.39M
Hedge Fund 27 5.81% 6.18M 112.11M
        Sovereign Wealth Fund 1 0.05% 0.05M 0.91M
    Brokerage Firms 6 0.03% 0.03M 0.54M
Strategic Entities 9 12.49% 13.27M 247.12M
    Corporation 1 5.00% 5.31M 96.16M
    Individual Investor 8 7.49% 7.96M 150.96M
Total 114 78.85% 83.81M 1,531.02M

STYLE

Investors

% O/S

Position (M Shares)

Value (M USD)

Other 10 42.18% 44.83M 817.93M
    VC/Private Equity 4 42.15% 44.80M 817.39M
    Broker-Dealer 6 0.03% 0.03M 0.54M
GARP 11 11.80% 12.54M 227.12M
Index 12 3.95% 4.20M 76.03M
Growth 23 3.23% 3.44M 62.30M
    Core Growth 16 2.08% 2.21M 39.96M
    Growth 7 1.16% 1.23M 22.33M
Value 18 2.19% 2.33M 42.44M
    Core Value 16 2.16% 2.29M 41.72M
    Deep Value 2 0.04% 0.04M 0.72M
Hedge Fund 11 1.43% 1.52M 27.53M
    Hedge Fund 11 1.43% 1.52M 27.53M
Income 3 0.07% 0.07M 1.29M
    Income Value 2 0.07% 0.07M 1.28M
    Yield 1 0.00% 0.00M 0.01M
Total 88 64.85% 68.93M 1,254.63M
         

Disclosure: I own shares of UPWK.

Disclaimer: This report is for informational purposes only and does not constitute individually tailored investment advice. Alpha Insights is not a ...

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Comments

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Alpha Insights 3 years ago Author's comment

When $UPWK debuted back in October of last year, the shares were oversubscribed by a factor of 20x. A colleague of mine noted that "nearly every investor that met with the company on the roadshow put in an order". They are a first mover and the market opportunity is estimated to be around $560 BILLION.

One potential catalyst for the share price which has fallen off the radar since the December swoon, is their partnership with $MSFT. On Dec 7, #Microsoft announced a partnership with UPWK to launch the Microsoft 365 freelance Toolkit. "The toolkit is an integrated workforce collaboration solution that helps enterprises work with freelancers at scale and is powered by Microsoft 365 and Upwork Enterprise". This move was very much inspired by Microsoft's own initiative to embrace a flexible talent model. Microsoft launched an internal pilot program to give employees access to flexible, freelance talent. Within the past year, Microsoft completed over 2100 projects on Upwork. These projects included writing, research, video editing, translation, design and data science. This level of integration is reminiscent of the early partnership between Microsoft and LinkedIn before Microsoft acquired them.

The market opportunity for #Upwork is huge, expanding and mostly untapped. So where are the analysts? This has a great deal to do with how the investment banking model works and a little known sell-side strategy called "momentum ignition". This involves a (possibly coordinated) series of "beat and raise" actions by sell-side analysts intended to trigger a mark-up phase in the stock price following a period of accumulation for their institutional client's books. To accumulate shares, the stock needs to have unrestricted float. Their post-IPO restriction period has not ended yet. Contrary to popular belief, stocks don't necessarily go down when the IPO restriction ends.

UPWK becomes an extremely juicy takeover candidate for a company like MSFT as the latter is positioning itself to dominate the B.I. and workforce productivity markets.

The rate at which companies are shifting towards a flexible workforce is accelerating and we are in the early stages of a systemic shift that will see flexible workforce models becoming the norm.

Barry Hochhauser 3 years ago Member's comment

Yes, that makes a lot of sense.

Craig Newman 3 years ago Member's comment

Nice to see some optimism about this stock. There hasn't been much out there.

Danny Straus 3 years ago Member's comment

I like #UpWork's model. I've actually been considering using them myself for my own startup business. They clearly have good marketing. Nice to learn more about them from an investment standpoint. $UPWK