Here's Why Upwork Exploded Higher Following Earnings -- and Why the Stock is Still a Buy

When Upwork (UPWK 1.83%) reported its third-quarter financial results early last month, shares of the freelancer marketplace vaulted higher, gaining 43% on the day following its earnings release. It seems a combination of depressed expectations, better-than-expected results, and robust guidance helped fuel the rise. Upwork's upward momentum has continued and the stock is currently up nearly 200% so far in 2020, leading some investors to wonder whether the train has left the station.

On this episode of Fool Live that aired on Nov. 5, "The Wrap" host Jason Hall and Fool.com contributor Danny Vena discuss Upwork's quarter and why the stock is still a buy even after its epic run. 

Danny Vena: Now, the other company that folks probably want to hear about is Upwork. Upwork is a company that I do not own. I followed with some interest because folks may know, that we at The Motley Fool, who are contractors use Upwork.

Upwork soared 43% today after it dropped earnings. What has happened here is, folks were pretty bearish on what was going on with Upwork, particularly given the challenges to the economy, and weren't expecting much. What happened, however, was that Upwork beat solidly on both the top and bottom line, as well as exceeding the company's own guidance. Which is what we want to see as Foolish investors.

They reported revenue of almost $97 million, which was up 24% year over year. To put that in context, expectations were for about $90 million. So $97 million is a pretty solid beat. When it comes to the bottom line, they delivered a loss per share of about $0.02 on a GAAP basis. That was only about a quarter of what Wall Street was expecting. Wall Street was expecting a loss of $0.08.

As you move down the earnings release, their marketplace revenue of $88 million, was up about 26%. Their gross margin improved about two percentage points to 73%. The take rate, which is the fees and commissions that the company collects from the transactions that have facilitates on its platform, that improved from 13.3% to 13.6%.

I do think that investors were really enthusiastic about the fact that the company is creeping ever closer to profitability. They were profitable on an adjusted basis. They are getting really close to being profitable on a GAAP basis as well.

CEO Hayden Brown said, "Our third quarter performance was fueled by strength from both existing clients and new clients who," and this is the important point, "adopted Upwork in record numbers." You have that happen.

Then, the company issued its guidance. The guidance was again, more bullish than what analysts were expecting. Management said that in the fourth quarter, revenue is going to be about $97 million. At the midpoint, consensus had been looking for about $93 million, so about 5% higher than what was expected. They also issued a full year forecast of $364 million, when the Street was only looking for about $354 [million], so about $10 million higher.

Not only did they beat on the top and bottom line, not only did they issue a forecast that was ahead of what Wall Street was expecting, but then you had Wall Street analysts who just began to pile onto the stock. They've got numerous upgrades. A lot of analysts that were already bullish on the stock raised their price targets. All-in-all you had a perfect storm for Upwork today. It did better than what people expected. It did better than what management expected. They put out a bullish forecast and Wall Street cheered and as a result of that, investors bid the stock up just a ridiculous amount, 43% as of close of market today.

Jason Hall: It's a great day and I think there's some important things to contextualize that sort of result within the bigger picture, because I'm sure there's tons of people that are looking at that big 44% jump and thinking, "Well, the best money has been made. Why bother at this point?" It's a stock that's just about doubled this year.

I think there's some really important context to consider. This is a $3.5 billion company still. Even after a huge day, this company doesn't have a $4 billion market cap. If you were to tell me that the gig economy is not going to be, I don't know, three times larger than it is today in 10 years, I'll eat this yellow Motley Fool hat right here on Motley Fool live (laughter). In 10 years, somebody write it down. The gig economy is growing. Look at what happened in California. The ballot measure that allowed Lyft (LYFT 0.37%) and Uber (UBER -0.35%), almost 60% of Californians voted for Lyft and Uber to continue to classify their drivers as contractors. That's clear that this is the work that a lot of people really prefer being able to have these things as independent work and not being employed by somebody. This is still a small company with a massive opportunity for growth. Then ticker UPWK, that's Upwork. Great stuff. Thanks, Danny.