Upwork

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 3/5

Upwork is a global online marketplace that connects businesses with independent talent, providing a platform for a variety of freelance work arrangements.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview Upwork operates a work marketplace platform connecting businesses with freelancers. The company generates revenue through various service fees applied to the transactions that take place on their platform. These are primarily:

  • Marketplace revenue: This revenue represents the majority and comes from service fees charged to clients for services accessed on the Upwork marketplace
  • Managed Services revenue: This revenue comes from the provision of services and engagement of third-party providers to perform services for clients. These services include managing payroll for clients on a temporary basis, as well as other related services.

Upwork’s focus is shifting towards larger enterprise clients, offering them a more comprehensive suite of services and management tools. The company has a global presence, with a significant focus on the US market. Upwork’s platform serves a broad range of industries and job types, from tech to creative fields. The strength of their network effects is increasing as more freelancers and businesses join the platform.

Trends in the Industry The freelance market is rapidly expanding due to the increasing flexibility and cost-effectiveness it provides for businesses, and a growing desire for gig work from many workers. The use of AI is also becoming very widespread among different companies, and for a freelancing company, there is scope for increased efficiency and effectiveness in different projects that are used by independent contractors. However, the competition among the different platforms in this market is also intensifying. Many tech giants and other established companies have started their own independent work marketplace or bought one from the smaller companies.

The company’s management has identified three key themes for the future: creating more opportunity on the platform for clients and talent, creating a more efficient marketplace and growing the market.

Margins Gross margins for Upwork are generally very strong, being above 70% consistently in the latest years, due to its SaaS-based business model, which implies the high operating and gross margins. But recently, its gross margins have fallen, as a result of high employee costs and increase in the cost of services provided, which leads to lower gross margins. Operating margins have been volatile, and are very sensitive to the changes in revenue, sales and marketing, and employee costs. Net margins have been fluctuating between positive and negative over the years. In general, it can be said that the company is not yet reliably profitable.

Competitive Landscape The competition in the freelance market is fierce, with various companies including public companies, and private start-ups trying to gain market share and expand their operations. Some prominent competitors in this market are: Fiverr, Remote.com, and Toptal. Upwork differentiates itself in two main ways:

  • focus on enterprise clients: The company is focusing more on large enterprise clients, creating a complex ecosystem which includes AI-based products for efficient hiring and payment processes
  • providing a wide variety of talent and jobs: Upwork has one of the largest marketplaces, where one can find all types of talent and every kind of job, ranging from data science, to content writing, etc. However, they have to be very diligent with their operations to remain competitive in a growing market.

Financials

  • Revenue: Upwork’s revenue has shown steady growth over the past few years, as reflected in their 10-K reports and latest quarters earnings. Marketplace revenue is the biggest part of total revenue.
  • Profitability: The company has had inconsistent performance with profitability and has shown volatile trends over the past couple of years. Net income has been in the negative territory several times, but in recent times the company has produced consistent profits in recent quarters.
  • Cash Flow: Overall cash flow is stable. In recent years, the company has been generating consistent positive cash flows, but also incurring considerable costs to manage the business and its expansion.
  • Balance Sheet:
    • The company has $394 million of cash and equivalents, and a high level of marketable securities which shows a strong ability to fulfil its short-term obligations.
    • They also have a substantial debt level of $390.1 million.
    • Their liabilities seem to increase slightly, which is something to look into.
  • Recent Concerns: Upwork, like many other similar companies, has been struggling with profitability and growing costs for its business. The company has laid off a substantial amount of its workers to save costs and has focused on growth with higher margins. As seen in its latest financial report, there was a slight reduction in the number of users. But, the company’s management believes that focusing on long-term sustainable growth is more important than short-term growth. There are certain concerns about the company’s stock price, which has not performed well. But the management is very focused on improving the quality of the products, the platform and services to provide better value to their customers in the long run.
  • Management Outlook: During the last few earning calls, the management has repeatedly stated that improving long-term profitability is their highest goal and they will make decisions accordingly. They have recently laid off many workers, and are focusing on new features such as a new AI-based hiring tool. These are all aimed towards creating efficiencies and improve profitability. The management believes that these changes will show results in the coming quarters. They have also stated that their target market is larger enterprise clients, rather than small businesses or individual clients, which should result in higher profit margins.

Moat Analysis Upwork’s moat can be classified as a network effect moat, which is a type of economic moat that arises when the value of a product or service increases as more people use it, which leads to higher network effects and customer stickiness on the platform. Upwork’s large and diverse network of freelancers and clients is a substantial advantage. However, this advantage is not unbreachable, since as competition intensifies, new companies or big tech giants might try to penetrate into the market. The company also has some degree of customer switching costs because, once a company starts using the company’s products, they may find it hard to switch to another marketplace due to existing userbase and reviews. However, many businesses are willing to pay more for a competing service if they find it a superior product.

Considering these factors, a moat score of 3/5 is appropriate. The network effect provides a competitive advantage but not as strong as some other technology companies that have a more loyal customer base, since the switching costs aren’t that high.

  • Legitimate risks that could harm the moat
    • Increased competition: As the freelance market grows, more competitors are trying to compete with the company by providing similar services.
    • Technological Disruption: As technology evolves, new platforms or tools may render Upwork obsolete. The use of new technologies such as AI-based hiring tools can displace the need for Upwork.
    • Economic Downturn: Economic downturn may lead to businesses cutting costs on independent freelancers.
    • Failure to capture enterprise clients: Upwork is dependent on enterprise clients for its revenue growth, and failing to retain such clients or attracting new ones can have an adverse impact.
  • Business resilience While the company is not immune to the risks, there are several sources of resilience:
    • Strong brand recognition: Upwork is a well-known name in the freelance industry, which means they have a relatively strong user base.
    • Diversity of clients and freelancers: The sheer size and variety of different clients and freelancers help reduce risk, as the platform isn’t overly dependent on one type of job or company.
    • Focus on long-term growth: The company’s decision to reduce short-term spending and to focus on long-term growth can provide more stability.

Understandability: 3/5 Upwork’s business model is relatively easy to grasp. Their core function of connecting businesses with freelancers is straightforward, and a good understanding of the concept of marketplace platforms can give more insights into the company. However, determining where exactly they will be able to compete, which type of clients will be attracted to the company, or how large the market will be, is quite complex. Also, understanding their financial statements is difficult since they tend to be affected by multiple variables, and there are a lot of non-recurring expenses.

Balance Sheet Health: 3/5 Upwork has a decent balance sheet, as characterized by large amount of cash and marketable securities. There are some signs of elevated debt, and the company should focus on improving margins to be more financially healthy in the long run.