Upwork’s stock price recovered in the fourth quarter after publishing encouraging financial results that showed that its business was still growing. The UPWK stock jumped to a high of $18, it highest level since August 2022, bringing its market cap to over $2.15 billion. So, is Upwork a good investment as it faces a key challenge?
Upwork has been a good growth company
Upwork is a technology company that has a big market share in the freelance industry, serving companies ranging from one-person startups to large global conglomerates.
The company is widely used by small and medium enterprises that need a global talent pool for one-off or ongoing projects. Recent customers include Guess, Bill.com, and HunterDouglas.
Upwork earns money in various ways. Its biggest revenue earner is the transaction fees it charges when freelancers and clients start relationships. It also earns money from subscriptions, where freelancers pay a monthly fee for connects and other features.
Upwork has also become a leading player in the advertising industry. In this segment, freelancers pay a small fee to market their solutions and reach more customers.
Upwork’s business has been in an upward trajectory, especially after the Covid-19 pandemic when many companies embraced remote work. As a result, its annual revenue has grown from over $300 million in 2019 to over $761 million in the trailing twelve months.
UPWK has become profitable
The company’s most recent financial results showed that its business was still doing well. Revenue rose by 10% year over year to $193 million, even as gross sales fell by 3% to $998 million. This revenue growth was likely due to higher prices.
Its marketplace revenue rose by 12% to $167 million, while its enterprise figure was largely unchanged at $26.4 million.
Most importantly, Upwork’s margins continued to grow. The gross margin rose by 222 basis points to 78%, and its adjusted EBITDA jumped to $43.2 million. Also, its cash and equivalents are strong at over $608 million.
The company has incorporated artificial intelligence (AI) into its operations by launching Uma, an AI assistant that helps users find talent faster. However, its AI features only aim to improve its services, not necessarily generate income. This includes its recent acquisition of Objective, which offers AI search solutions.
Analysts anticipate that Upwork’s business will slow in the near term. The average estimate for the annual revenue in 2024 is $758 million, a 10% increase, followed by $775 million in the next financial year.
Read more: Activist investor Engine Capital pushes for board shakeup at Upwork amid declining stock performance
Upwork has a big unsolvable problem
Upwork’s biggest challenge is monetization, a process that will get difficult as it keeps raising its commission. In most cases, Upwork connects freelancers with employers, who then move on to communicate through external platforms like email and Slack.
After that, these freelancers receive cash from their clients directly to avoid the substantial Upwork fees. As a result, Upwork loses substantial fees over time.
The challenge is that this problem is difficult to solve since companies will always communicate with freelancers.
Upwork stock price analysis
UPWK stock chart by TradingView
The weekly chart shows that the Upwork share price has done well in the past few weeks. This rebound happened after forming a double-bottom pattern at $8.68, with a neckline at $15.6. A double-bottom is one of the most bullish patterns in the market.
The stock also hovers at the 78.6% Fibonacci Retracement point and has moved above the 50-week moving average. Therefore, while the company faces major challenges, it is likely to resume the uptrend and move to the 50% retracement point at $34.85.
This UPWK forecast is much more optimistic than what analysts expect. The average estimate among analysts is that its stock will rise from the current $16.1 to $18.8.
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