Two years ago, Upwork (UPWK 1.17%) ranked on my list of top stocks under $10 -- it was worth just $7.73 per share at the time. Now trading for $22.20, the company has come a long way despite some near-term challenges in the economy. Has the unique freelancer platform peaked, or can it continue its growth trajectory? Let's dig deeper.
What is Upwork?
Upwork is a global freelancing platform that connects businesses to remote workers with skills ranging from web and graphic design to copywriting. It enables clients to find top talent without going through the traditional hiring process and it's positioned to capitalize on the fast-growing gig economy and work-from-home revolution.
Image source: Getty Images.
Analysts at Absolute Reports expect the freelance platform market to expand at a compound annual growth rate of 15.3% to roughly $9.2 billion by 2027 as businesses increasingly take advantage of the flexibility that companies like Upwork offer. But while investor interest in stay-at-home-related stocks soared during the pandemic years of 2020 and 2021, market sentiment seems to have cooled in 2022, sending Upwork's stock price down 34% year to date.
Macro-economic headwinds are a major challenge
The decline in Upwork's share price probably has a lot to do with macro-economic challenges like rising interest rates, which tend to hurt growth stock valuations because higher rates increase the cost of the capital they need to grow -- while reducing the amount of capital that investors have to put into the stock market. Upwork is also impacted by the conflict in Eastern Europe, which is a key freelancing market.
According to management, approximately 10% of Upwork's 2021 revenue stemmed from either clients or freelancers in Ukraine, Russia, and Belarus. While Upwork decided to end operations in Russia and Belarus as of May, the company has enjoyed a surge in business from Ukraine, which may help offset the lost business opportunities. Ukrainian freelancers are engaging with Upwork more than ever, with the number of project bids from Ukrainian professionals up 25% from pre-invasion levels.
Upwork's business performance has also held up pretty well despite the crisis, with revenue jumping 24% year over year to $141 million (although management hasn't provided guidance for the second quarter).
Upwork looks like a hold, for now
Over the long term, Upwork's performance shows a troubling trend. While revenue has grown 72% between 2019 and 2021, operating losses have almost tripled from $18.7 million to $56.2 million over the same period. Expanding losses are normal for growth stocks. But investors are losing patience with cash-burning companies because they are vulnerable to rising interest rates, which could make debt financing more expensive and raise the possibility of equity dilution.
That said, Upwork is still a great way to bet on the expansion of the global freelance economy. And the conflict in Eastern Europe probably won't have a long-term impact on its operations. While the stock is no longer a screaming buy, it could have a place in a diversified investment portfolio.
