Faced with pressures from the macro environment, Upwork, Inc. (NASDAQ: UPWK) is still durable. It has suffered numerous disruptions: pandemic, inflation, and geopolitical tension in Europe, to name a few. Although he reduced his Q4 and the whole year guide, the market opportunities remain evident. Your strong and intact fundamentals will help you capitalize on these levers while maintaining your trades. Its liquidity position is impressive with well covered loans. Meanwhile, share price remains divorced from fundamentals. But the potential returns are more attractive.
As Upwork, Inc. approaches the end of the year, it demonstrates that its business model and value proposition remain critical to clients during economic volatility. The pandemic has led to paradigm shifts in work settings and the workforce. Hybrid and remote work setups were inevitable as digital transformation reached its peak. But it was the pandemic that picked up the pace, forcing many workplaces to adapt to the changes. Businesses also went online as online transactions became more convenient for customers and employees. In the midst of the Great Resignation, the new reality of work has also been transformed. It has intensified as restrictions eased ahead of impending RTOs across industries. Amid fundamental changes, going back to pre-pandemic settings could be next to impossible. no wonder that 71% of companies plan to include remote work in their SOP. This trend opens up more ways for Upwork to expand and re-introduce its market presence to more companies, hiring managers, and professionals.
Operating income for this quarter amounted to $158.64, a year-on-year growth of 24%. Even better, quarterly revenue saw a steady increase over the past year. Annual revenue growth is also holding steady after accelerating in 2021. It can be attributed to more clients and professionals entering the market. In fact, it has benefited from the drastic changes in the labor market in the last two years. As of Q3, cumulative revenue is $455 million, already accounting for 90% of full year revenue in 2021. It shows that Upwork has performed better this year. Its market and managed services revenues are on an upward trend, showing sustained strength in both segments. We also have to consider the more volatile economy as inflation sets in. Upwork remains stable which makes it a reliable business in the industry.
Upwork remains well positioned with a clear value proposition. Your presence in the market becomes more evident, as evidenced by your active branding campaign and increased customer engagement. Thanks to its attractive business model that maintains the hiring process and talent acquisition flexibility, cost reduction function and operational agility. It seems more essential today, as inflation drives costs and expenses to rise. Its instant and affordable delivery of talent in more than 180 countries helps improve margins and spur growth amid economic uncertainty.
However, you should not be complacent. Despite its recent milestones, it has further improvement to sustain its growth and better manage costs and expenses. Its active customers, for example, continue to rise, but comparative growth appears to be cooling. The same goes for your GSV per active customer. I find this trend logical as market growth may be peaking. Also, two years have passed since the pandemic began, so many customers have already adapted. Not surprisingly, Upwork has lowered its Q4 guidance to match its recent financial trends. Upwork must do everything possible to retain its customers while expanding its market. There are still many untapped potentials that can stimulate your performance.
You have to remain cautious to reduce cash burn. Your operating income is still a negative value since your expense is still high. Research and marketing expenses are the main drivers. Fortunately, they remain well managed and commensurate with operational size and capacity, and show consistent asset management. It should maintain or even improve its strategies, given the seasonal and weakening macroeconomic conditions. You should also review your pricing structure to balance market acceptance rate and customer spending.
Changes in the labor market and business landscape and untapped potentials
The unprecedented events of the last two years have transformed the labor market. Remote and hybrid work setups have become the new reality of work. As the Great Renunciation remains in evidence, workplaces have to meet the new market standard. In a study that compared pre-pandemic trends and 2022, we can see the comprehensive changes in the last two years. Recent surveys show that 32% they prefer to do remote work for five days each week or 100% remote work. This is regardless of the fact that hybrid or flexible work configurations will be implemented. Globally, Americans are more prepared for it. Latin Americans and Australians are also open to this possibility with 22% and 21%, respectively.
In addition to convenience and lower costs, the preferred configuration also saves time and energy. It allows many workers to have side hustle. In 2020, 48% of the self-employed worked part-time, while 36% are full-time self-employed. The remaining 14% were full-time employees who decided to freelance for additional income. Competition can be a concern, but Upwork is still the top provider. With a greater preference for remote setups, the standalone market will most likely continue to expand. It will be one of the main engines of growth in the supply and demand of self-employed workers.
In the US alone, there are more 70 million Freelancers Projections show the number may top 80 million by 2026. The prospect is possible given that most companies plan to include remote or hybrid work setups in their standard business. Additionally, Upwork has a strong customer base and brand loyalty. It serves large companies, such as Marriott International (MAR) and iCIMS (TLNT). You can take advantage of the popularity of these companies to maintain your competitive edge and attract more customers.
Also, there is still a lot of untapped potential in the independent market. Upwork can expand your presence in emerging economies. Why? They have a higher labor intensity. Salaries can work better for companies and clients, allowing them to maximize their capacity. Still, you can unleash your potential in the US if you want to. Although the labor market is evolving, there are opportunities that you can take advantage of to expand and attract companies and freelancers. As of 2022, at least 35% of employees still do not have access to remote work settings. The percentage is lower than pre-pandemic levels, showing that companies have opened up to it. However, it remained high, which can lead to massive changes in the market once they enter. In fact, Americans are embracing remote and flexible work settings, and they want more of them.
On the business side, business reopenings can become a growth engine for Upwork. Many small businesses have limited ability to create, design, and develop their websites. They may have to spend at least $1,000-1,500 to do so. But the average cost comes to $2,400, which may not be convenient, especially for startups. Social media websites are common tools for marketing and promotion, but most of the recruiting process takes place on Upwork. Already in 2018, fifty% of small businesses have adopted agile workforces. Upwork was at the forefront of this transformation. Now, more small businesses are opening with a net increase of 700,000 starting this year. Even better, 27% of small businesses don’t yet have a website, which can open more doors for Upwork to help them recruit talent. The expansion of e-commerce will also have positive spillover effects on the freelance market, leading to increased demand for remote staff and assistants.
Maintain Solid Foundations
With these market risks and opportunities, Upwork must be able to sustain its operations. Economic volatility may continue to hit you as trading costs remain high. Although income and rents evaluate its performance, liquidity shows its ability to sustain it. Upwork has an excellent liquidity position with a current ratio of 3.5x.
Plus, your cash and cash equivalents alone can cover all of your current liabilities. You can also cover your loans if you decide to make a lump sum payment. It is also a vital aspect, since increases in interest rates increase the cost of borrowing. Cash and cash equivalents comprise 86% of total assets, making it liquid. You can also use excess cash to increase your investment in the burgeoning freelance market.
However, you should take note of your brand marketing spend. This quarter, he plans to spend $19 million, bringing the total to nearly $80 million. It is in line with your expansion, but a reasonable reduction can have a substantial impact on your viability, allowing you to reach your target value.
Stock Price Evaluation
Upwork, Inc. stock price remains under pressure. It’s higher than its 2020 lows but lower than its pre-pandemic and 2021 averages. At $12-14, it’s 59% lower than the asking price. It may decrease further as fourth quarter guidance is reduced. But it seems to be an opportunity for potential earnings. Growth prospects are promising amid economic volatility. It’s still too cheap, trading at less than 3x revenue. With a plan to increase your revenue and EBITDA, the stock price seems like a good entry point. With your current cash levels and overall liquidity, you can achieve your projections which may lead to a price rally.
Upwork, Inc. remains well positioned in an evolving market landscape. Your revenue growth is holding steady, though you need to do more to sustain it. It has excellent liquidity that allows it to cover its indebtedness and expand its operating capacity, which makes growth prospects attractive. Meanwhile, the stock price is still trending down, which makes it ideal. The recommendation is that Upwork, Inc. be a buy.