The market has been so brutal with tech stocks that even strong results are no longer rewarded. up work (NASDAQ: UPWK) survived a major business interruption when business was affected by the Russian invasion of Ukraine, but shares trade at recent lows anyway. Me investment thesis remains ultra-optimistic on the freelance market with the gig economy poised to thrive in the worsening labor market and workers well-equipped for remote work.
Upwork reported third-quarter 2022 revenue of $158.6 million, slightly beating analyst estimates. What really matters is that the freelance market increased its revenues by 24% year-on-year despite the Russian problems.
The company will continue to benefit from the shift to remote and hybrid work, opening up an opportunity to include freelancers as part of this workforce. Despite everything, however, Upwork faces a difficult environment with high comparisons to previous years and macroeconomic weakness that slows growth in the short term.
Both Gross Services Volume and Active Customers posted weaker growth in the quarter. GSV surpassed $1 billion in the quarter, but the number only grew at a 14% pace. Active customers only grew 9% to 818,000 and the company exceeded 20% growth rates in 2021.
Despite strong growth, Upwork continues to experience weak market demand and companies dominate spending and costs. However, the freelance marketplace continues to promote clients to save up to 50% by using their marketplace instead of alternative contracting options.
In many cases, turmoil in the macro environment can cause potential customers to pause plans before implementing a directive to continue using a cheaper market option. As such, Upwork led 22Q4 revenue on a sequentially stable basis with Q3 revenue of $159 million growing ~16% YoY.
Analysts expected revenue generally in line with these $160 million estimates, but the expectation was for revenue to grow ~$2 million sequentially. The market can be picky about such scenarios, but investors should not stress flat numbers in this macro environment during the holiday quarter.
The value of the shares has fallen to $1.6 billion, yet the company forecasts 2022 revenue of $616 million. Upwork was only trading down during the early days of covid, yet the company has substantially increased revenue both during covid and during the war in Ukraine, putting up to 10% of revenue at risk.
As highlighted in the chart below, the stock market is overly dramatic with share price swings. While revenue continues to grow steadily, Upwork has bounced from a low of $6 to a high of over $60 in late 2021 with a round trip back to $12 now.
The market is starting to confuse covid developments in many cases in the tech and market spaces and without really understanding that a company like Upwork is producing at a much higher level of sales. As an example, the company only reported Q4 2019 revenue of $80 million while expecting nearly double the revenue in Q4 2022 despite a couple of massive setbacks for the business during the period.
The company should definitely report the slowest growth rate since it went public in the current quarter, but investors should be careful about extrapolating too much into the slowdown. Upwork saw revenue growth peak at 42% in the second quarter of 2021 after reporting just 18% in the second quarter of 2020 and these revenue advances make the bar higher, especially in a weak economy. .
Upwork is pretty much EBITDA breakeven here with a plan to hit positive EBITDA next year. The company has a cash balance of $678 million (offset by $564 million in debt) which provides the capital to invest in growing the independent market without being overly focused on profits.
As a reminder, management decided to spend aggressively on brand marketing this year with an impact on the bottom line. Upwork anticipates spending $19 million on brand marketing during the fourth quarter with total spending of $80 million for the year.
A decent cut in brand marketing spend would quickly turn the $7 million forecast Adjusted EBITDA loss for the year into a profit. Upwork plans adjusted EBITDA margins of 30% to 35% long-term as the market grows to a $1 billion+ platform.
The key takeaway from investors is that the guidance will definitely leave stocks depressed in the short term. The market loves to over-extrapolate short-term figures leading to the wild price swings at Upwork in the last two years.
Investors should use this weakness to load Upwork leading to a 2023 that could be much better after the Fed pauses or turns on rate hikes. The company doesn’t need perfection from here to reward investors with trading close to 2x 2023 sales targets.