Gig economy talent management platform Upwork (UPWK +3.35%) recently put the final touches on its 2019 report, and the year ended on a high note. Revenues picked up pace as did adjusted profits, and the outlook for the new year wasn't bad either.
However, the leader in online access to remote and freelance independent professionals has been dealing with longer-term decelerating growth, and the recent IPO and fast expansion of rival Fiverr (FVRR +5.07%) hasn't helped.
Nevertheless, now down over 40% from its own IPO in 2018, this small-cap growth stock remains on my buy list.
2019 by the numbers
Upwork's fourth-quarter revenue increased 20% (on an adjusted basis excluding accounting rule changes), down from the 23% rate notched in the third quarter but higher than the high-teens percentages during the first half of the year. The company enjoyed higher gross margins on services as it continues to add more freelancers and services to connect them with businesses in need, which offset another increase in operating expenses -- mainly due to higher marketing and admin costs.
In total, it was a solid showing for Upwork, and the bottom-line (adjusted to back out stock-based compensation and other non-cash items) is now in the black.
|
Metric |
Full-Year 2019 |
Full-Year 2018 |
Change |
|---|---|---|---|
|
Revenue |
$300.6 million |
$253.4 million |
19% |
|
Gross profit margin |
70.7% |
67.8% |
2.9 pp |
|
Operating expenses |
$231.2 million |
$183.6 million |
26% |
|
Adjusted net income (loss) |
$5.52 million |
($596,000) |
N/A |
Pp = percentage point. Data source: Upwork.
Betting on the gig economy
It's clear that growth in global internet access and cloud computing is helping more professionals go the way of the gig economy and work on a remote and freelance basis. Upwork may not be expanding at the rate some hoped (initial revenue outlook for 2020 implies a 13% to 15% increase over 2019), but there is still a lot of potential here. CEO Hayden Brown (who took the reins on Jan. 1, 2020) noted on the last earnings call that freelance work -- in the past mostly utilized by smaller businesses -- is beginning to gain traction with larger employers. New conversations with such organizations are only just beginning, surrounding how they can make use of the platform's network of remote professionals.
Image source: Getty Images.
Thus, while the year-ahead outlook may be disappointing, Brown said her priority is returning Upwork to growth north of 20% a year. While rival Fiverr brings in less than half the revenue Upwork does, it expects to grow at a much faster 30% to 32% rate in 2020. Both outfits are very small, so Brown's goal doesn't seem over-optimistic.
But what about the issue of valuation? Upwork is still in heavy-spending mode to promote growth, so profits are negligible to the point where they aren't useful. Investors are left with the price-to-sales ratio (market cap divided by sales). Upwork is trading for just 2.9 times sales based on one-year forward estimates, compared with 7.1 for Fiverr.
Granted, Fiverr deserves a higher valuation because of its fast growth outlook, and 2.9 times sales isn't necessarily cheap for a company that generates little in the way of profits. However, the potential is there as gross margins are north of 70% and still rising. A lot is hinging on the company being able to deliver further revenue upside, but I'm willing to nibble on the stock and bet that happens.
As I typically do with my small growth stock holdings, I've now purchased Upwork a couple of times over the last few months, with each purchase less than a quarter of a percent of my portfolio value. I will continue to do so periodically until I build up a total holding worth 1% to 2% of my total portfolio. However, if Upwork can deliver on its goal and reignite sales growth, this small bet on the gig economy should pay off in the years ahead.
