Things haven't panned out for Upwork (NASDAQ:UPWK) stock thus far in its short journey as a public company. Even as the freelance employee hiring platform grew revenue 19% in 2019, shares have tumbled nearly 75% from their all-time high. Granted, the market needed to reevaluate the business based on current expectations, and the coronavirus market sell-off hasn't helped matters. Nevertheless, at this point, shares look like a bargain going for just 2.3 times sales, especially if revenue does in fact grow at least 13% in 2020, as management has forecasted.
But in light of recent events, there's a good chance that there are more speed bumps ahead. Nevertheless, the longer-term prospects for Upwork and other gig economy companies look promising in a post-pandemic digital world.
The bad news
It needs to be understood that with the lockdown to halt the spread of COVID-19, there will be economic pain. According to the Department of Labor, initial claims for unemployment insurance surged by over three million week over week to reach 3.28 million on March 21, 2020. That's the biggest weekly increase ever, and it's likely to continue to grow in the weeks ahead due to social distancing and shelter-in-place orders.
It remains to be seen how bad the economy gets, but it's a foregone conclusion that a big step backwards just took place. With economic activity going lower, many businesses have already begun to cut spending. One quick and easy way to reduce expenditures is by reducing and/or eliminating business contractors -- non-employee workers that get hired on a freelance basis. This could be bad news for Upwork, which makes its money by connecting freelance workers with businesses and handling payments to these workers.
That could spell further trouble for Upwork stock, since the company increased sales and marketing spend by more than 31% in 2019 to promote growth. Likewise, general and administrative costs also grew 36% year over year. If Upwork's revenue doesn't rise at least in line with the outlook, further pain could be in store, and a need to curb its own spending would be in order.
On the way to better times
Of course, short-term bumps in the road are to be expected, and with coronavirus taking an unprecedentedly fast toll on the world, it wouldn't be surprising if Upwork reels for at least a couple of quarters as it adjusts to the current reality. However, there are some silver linings in this situation as well.
The gig economy is expanding quickly as the workforce gets more independent, and remote work options become more viable. Many businesses have also found that the added flexibility of hiring freelancers suits their needs. According to a study by digital payments provider Mastercard, global gig economy payments reached $204 billion in 2018 -- and about 58% of that total was generated by ride-sharing apps like Uber. Based on the study, though, global gig economy payments are expected to more than double to over $450 billion by 2023, driven by an increasingly digital world and a cultural shift in values that favors more work flexibility.
While disruptive for now, shelter-in-place orders could speed up that migration. Work-from-home just got a massive shot in the arm, and many organizations are suddenly scrambling to invest in the ability to allow employees to work remotely -- investments that are unlikely to get tossed out the window once the coast is clear. Rather, mobility -- or at least an increase in mobility -- could be here to stay for many workers.
That plays in favor of Upwork and other gig economy companies that benefit from a remote workforce. Once the dust settles, businesses may start reexploring options and granting more permanent freedom to employees. Upwork might be able to scoop up some new business as a result and provide the link between workers and those hiring them.
Upwork narrowed in on breaking even last year and ended up reducing its cash balance by $70.5 million during the period. But the technologist still had $133.9 million in cash, equivalents, and short-term investments on its balance sheet at the end of 2019, so it's well positioned to weather the storm for now.
Investors will want to look for clues about the trajectory of hiring and the amount of activity on Upwork's platform in the coming quarters to see if it has staying power during the economic contraction. The situation could get dicey for a while, but the coronavirus crisis may have just given the gig economy a big long-term boost.