Upwork Inc【UPWK】株式ニュース

Upwork: A New Inflection Point

May 15, 2020
Seeking Alpha
By Gary Alexander

Upwork shares have doubled since late March, owing to a rise in users and site traffic since the coronavirus began.

Rising unemployment has led many out-of-work job seekers to turn online.

Upwork isn't simply a freelance company; it has brand-name hiring partnerships with companies like Glassdoor.

Revenue growth has accelerated in the wake of the coronavirus, and Upwork's CEO notes that its site saw record visits in April.

Since I last wrote on remote job marketplace Upwork (UPWK) in late March, shares have more than doubled. Back when the market was at its nadir, investors were worried that Upwork's small market cap and niche appeal would render it too weak to survive the pandemic, and investors sold off Upwork like they did many other small-cap stocks. Yet the coronavirus has proven to be a blessing in disguise for Upwork, with the company recording huge volumes of traffic to its site and generating revenue acceleration. In my view, the vastly changed macroeconomic landscape - one that has confined many office workers to their homes, and left many more unfortunate workers without jobs and needing to resort to freelance work to pay the bills - has completely rewritten Upwork's growth trajectory.

Since Upwork's earnings report in early May, the shares have risen more than 50%, and though Upwork is now up year-to-date, the stock is still about 35% below all-time highs near $18 notched shortly after Upwork's IPO in late 2018. It's a good time for investors, in my view, to examine the momentum trade and review the bullish case for Upwork.

My earlier thesis that Upwork would benefit from increased site traffic throughout the pandemic (for which I used Google Trends search data at the time) has largely been confirmed by CEO Hayden Brown's appearance on CNBC this week. In the interview, Brown emphasized that some of the world's biggest employers have turned to Upwork during this critical time, saying:

Companies like Microsoft (NASDAQ:MSFT) come to us looking for talent that they can't find locally that we can supply through our platform, because we've got millions of workers all over the world who are skilled at remote work and are ready to get started."

As a further illustration of how Upwork has integrated itself into mainstream employers and isn't just a freelance site, other marquee corporate partners aside from Microsoft include General Electric (GE), GoDaddy (GDDY), and Automattic, the parent behind the Wordpress blog site. Upwork also partners with a wide slew of smaller businesses as well, and has been focused on remote work for twenty years. Since the coronavirus began, Brown noted that Upwork has been offering consulting to its various corporate customers on how to hire and maintain remote workforces, transforming its role and relationship to employers in the hiring market.

There's a lot to like about Upwork at this juncture - aside from its most recent traffic/revenue trends, Upwork also has strong cash balances and a consistent margin improvements and a low-cost business model that allows for impressive scalability. Plus there's the recent slew of insider buys since March that I detailed in my prior article. And despite the recent rally, Upwork is still cheap. At current share prices near $14, Upwork has a market cap of just $1.60 billion. After netting out the company's $145.3 million of cash and minor $31.3 million of debt on the balance sheet, its enterprise value is $1.49 billion.

For FY20, meanwhile, Wall Street analysts have a consensus revenue target of $336.0 million for Upwork, or +12% y/y (per Yahoo Finance). Considering Upwork's first-quarter 2020 revenue showed acceleration to 21% y/y growth, a 12% y/y growth rate for the full year is likely conservative especially when all signs point to the coronavirus being a tailwind for Upwork's growth. Regardless, even if we simply take this consensus revenue forecast, Upwork trades at a modest 4.4x EV/FY20 revenue. That's substantially below most other companies projected to grow in the ~20% range this year (a high single-digits multiple is more common among ~20% growth comps), especially when we consider the fact that Upwork is perfectly suited to the remote-work environment and is also generating gross margin expansion and free cash flow growth.

Stay long here and ride the upward momentum.

Let's now dig into Upwork's latest quarterly results in greater detail. The earnings summary is shown below:

Source: Upwork Q1 earnings release

Upwork's revenue grew 21% y/y to $83.2 million this quarter, substantially beating Wall Street's forecast of $80.0 million (+17% y/y), and perhaps even more impressively yet, seeing two points of acceleration in revenue growth versus Q4's 19% y/y growth rate - in a quarter when most companies have reported slowing growth.

For Upwork, of course, the coronavirus has been the exact opposite - a tailwind. Per CEO Brown's prepared remarks (key points highlighted) on the Q1 earnings call:

In early to mid-April, we began to surpass pre-crisis levels on numerous client activity metrics and momentum has continued to build. In the last week, for example, we broke our own records by a significant margin on leading indicators such as client registrations and new job posts. While it's still early in these trends, we are optimistic that these leading indicators of future spend will translate, as they typically do, into GSV and revenue. These signals indicate companies have shifted from the triage phase in March to a transition phase in April, as they are now focused on getting work done in new ways as they navigate the opportunities and constraints this crisis has created."

We have to acknowledge that there are still some risks on the horizon, however. Upwork does maintain a meaningful portion of its revenues from small and mid-sized employers, who have in recent times cut back on overall hiring and workforces in an attempt to preserve cash. Upwork has noted that these SMB clients' spend has decreased since March - although clearly, record-setting trends in visitors and job postings have been more than enough to offset higher churn from SMBs.

It's also useful to note that Upwork now has a plan to sustain >20% y/y revenue growth "in the years to come." Companies typically err on the conservative side when giving long-range targets, so the fact that Wall Street consensus only calls for 12% y/y growth this year and 14% y/y in FY21 leaves plenty of room for upside surprises.

Capitalizing on greater economies of scale, Upwork has also increased its gross profit margins this quarter too - up three points to 72% this quarter. This largely is a reflection of the fact that Upwork's "take rate" - or the percentage that it makes from a hiring transaction conducted on its platform - is up 80bps to 14.9% this quarter, from 14.1% in the prior-year Q1, driven by an increase in pricing and the rollout of paid client subscription plans.

Figure 2. Upwork gross margin trends

Upwork's focus on growth to capture market share during a time when the global workforce is focused on remote-work, however, has pushed the company into spending more on sales and marketing. Sales and marketing costs on a pro forma basis (that is, excluding stock comp) rose 50% y/y to $29.8 million, which also drove Upwork's pro forma operating margins down to -3%, versus breakeven in the year-ago quarter. Still, however, investors should be willing to sacrifice a few points of margin in the near-term to accelerate revenue growth and take full advantage of Upwork's recent surge in traffic. To offset some of this increase in marketing, Upwork has also cut travel & entertainment expenses (naturally, like most other companies with sales teams that are now grounded) and slowed down hiring and vendor spend.

In spite of slightly deteriorating operating margins, however, Upwork has still been able to deliver cash flow improvements. Q1 operating cash flows were virtually breakeven at -$1.7 million, versus a -$29.4 million cash burn in last year's Q1. Note, however, that on a full-year basis Upwork has been cash flow positive in each of the last two years; this OCF improvement in kicking off Q1 points to cash flow expansion in the year ahead. And with roughly $130 million in net cash on Upwork's balance sheet, we have no concerns on this company's ability to maintain a sufficient liquidity cushion.

Figure 3. Upwork cash flow trends

Key takeaways

Prior to the coronavirus, most investors regarded Upwork as a rather insignificant company filling an obscure niche for freelance workers. Now, however, remote work has moved into the mainstream - both for freelancers and large corporate employers. Upwork has seen encouraging trends, reporting acceleration in revenue on top of record-setting job postings and site traffic, and has a plan to sustain >20% y/y revenue growth over the next few years. Sitting at a valuation of just under 5x forward revenues despite its positive exposure to the pandemic and remote-work trends, I believe Upwork still has plenty of room to rise higher.

Job Market Stocks Poised to Soar Once the Back to Work Order is Cleared

Insider Financial
By Chris Sandburg
May 15, 2020

The jobs numbers were the catastrophe everybody was expecting. The period between the second week of March and the second week of April — was the worst month for American workers at least since the Great Depression and possibly in the history of our great nation. With the abundance of qualified individuals who are out of work, it appears that employment service-related companies are geared to take advantage of this once in a century opportunity.

With the potential for much of the economy to reopen in the coming months, at least some portion of America’s laid-off workers will likely be called back to work. Yet layoffs could also rise again if state and local governments are forced to reduce their staffing or if a second wave of infections forces another round of shutdowns later this year.

Against that backdrop, what is the state of America’s job market, and what PubCo’s will benefit moving forward? Here are some questions and answers:

WHAT DOES THE DECLINE IN JOBLESS CLAIMS SIGNIFY?

Last week, 3.2 million people sought unemployment aid, down from all-time high of 6.9 million at the end of March. The new record level that was set in March was 10 times the previous high. Some economists see the decline in applications for unemployment aid as a sign that the job market may at least be bottoming out. With state wallets burning through funds to keep an influx of capital to their unemployed residents, a push for getting these individuals back to work and seeking employment will be their first priority even though most states Department of Labor (DOL) state on the weekly qualification for unemployment benefits, they do NOT need to seek work (usually 3 inquiries a week) due to COVID-19 and most states are still on one form of lockdown restrictions or another.

After the return to work order comes, people with gravitate toward employment platforms like the Indeed.com’s, CareerBuilder.com’s (majority owned by Apollo Global Management (NYSE: APO), Monster.com’s and growing social media platform LinkedIn.com (acquired by Microsoft (NASDAQ: MSFT) in Dec of 2016 for $26.2 Billion) to assist in getting out their resume and finding work. We will call this Phase 1 of recovery on the employment front.

UTILIZING STAFFING AGENCIES AS WE ALL GO BACK, A QUICK FIX?

As states “reopen” amid historically high unemployment, agencies devoted to helping people find jobs are still operating, often remotely. Many are continuing to counsel clients and help with job placements. Staffing agencies are also meeting with job seekers on an as-needed, appointment only basis.

Companies we found in this space include UpWork Inc. (NASDAQ: UPWK), Robert Half Int. (NYSE: RHI), Insperity Inc. (NYSE: NSP), HireQuest (NASDAQ: HQI) and Korn Ferry (NYSE: KFY). All of these companies have already seen around a 100% price increase since the bubble pop in mid-March.

UpWork was as low as $5.43/share on March 18, 2020 and as of Wednesday May 13, it was trading at $13.48/share (+148% last 7 weeks) — Very Impressive. The others have bounced significantly also, but still have quite a gap to fill before they reach their February of this year’s highs. An example: Robert Half was as high as $60/shares in late Feb., fell as low as $32.75 on March 23rd and now back in the $46 range. Insperity, a similar chart, was trading in the low $70’s in February, as low as $22.29 March 18th, has roared back to $50+ a share. Korn Ferry followed suit trading in the $42 range in February, as low as $21.60 March 23rd, and at $27+ now. As well as these companies have corrected, increased demand in the 2nd half of 2020 could result in testing those February 2020 highs in the near future.

Job Recruiter

EMPLOYMENT REBOOT, DON’T FORGET TO RECRUIT?

Job recruiters and recruiting websites and platforms are another layer of the job market sector that should see potentially an overwhelming boost. Companies like Recruiter.com (OTCMKTS: RCRT), Recruit Holdings Co., Ltd. (OTCMKTS: RCRRF) and other agencies will be busy in the later part of this year.

Recruitment is a positive process of searching for prospective employees and stimulating them to apply for the jobs in the organization, also known as head hunting.

Recruiter.com, an online global recruiting service that offers an industry-leading job market technology platform has a highly engaged membership base, and also works with hundreds of clients and employers. On March 19th, the company’s stock was at a low of $1.20 but has since found its way back to $2.50/share today.

Background Checks

HR MANAGERS READY FOR SCREENING, ONBOARDING AND BACKGROUND CHECKS?

Now that employers have found their candidates from the pool, the next phase will begin — Getting these future employees into the system, but not with proper screening, background checking and eventual onboarding.

Intel365 CEO Crispin Cruz commented,

“When Hiring Managers call, we are going to pick up, treat them as if they are our top enterprise clients and assign them a representative for their account.”

Onboarding and TAT (TurnAround Time) seems to be the hyper focus of Human Resource managers at the moment. When it comes to screening and background checks, the expectations are a 24-48 turnaround time. Having access to data, insights, and best practices pertaining to an array of areas affecting today’s workplace environments is key including contingent worker screening, identity verification, drug screening, continuous monitoring, and social media checks.

Intel365, recently acquired by Xalles Holdings (OTCMKTS: XALL), finds themselves competing for their slice of the pie in the market sector where majority share for screenings are taken by companies such as HireRight (merged with GIS in 2018), First Advantage (to be acquired by Silver Lake for $1.5 billion) and SterlingCheck.com (officially Sterling Infosystems Inc).

Some of the larger players have seemed to lose that personal touch and shift focus more on keeping their enterprise accounts happy. Along with failure to appeal to the small business, some have found themselves in hot water in the past with compliance issues. HireRight was the subject of a number of class-action and Fair Credit Reporting Act (FCRA) lawsuits. In 2011 the company paid $28 million to plaintiffs who accused HireRight of failing to provide copies of reports to job applicants and failing to resolve disputes. Background-check company Sterling Infosystems Inc. also had to pay $8.5 million and make policy changes to resolve a Consumer Financial Protection Bureau lawsuit accusing it of violating the rights of roughly 7,100 job seekers. First Advantage is dealing with a similar class action in motion where more information can be found here.

“We have yet to be fined, and still give that personal touch”, added Intel365’s Cruz. “Being client centric is our mission with Human Resource managers as they require candidates to move fluidly through the process. When running a screen, only about 10% come back with issues. Unfortunately, by time these checks come back, the candidate has already gone through multiple interviews expelling valuable time and resources, although it’s less cost effective for employers to do these checks prior to interviewing.”

INVESTMENT SUMMARY

As you can see, many of these companies have seen dramatic rebounds, as almost all stocks, since the initial March meltdown, but if you are looking for speculative growth, the job market sector looks like a good one as the need for their services will be in demand as the country recovers. Many companies are still much lower than their February highs and can bring healthy returns if and when they reach that milestone again. Smaller companies like Xalles’ have positioned themselves with smart timely acquisitions like Intel365 who are estimated to generate $500,000 in revenue this year and quadruple that to $2,000,000 in 2021 according to recent press.

If layoffs, furloughs and unemployment were not enough, adding to the mix are all the college students shifting to the workforce rather than drowning themselves in student debt. With many universities already notifying students that classes will be done via Zoom classroom (NASDAQ: ZM), they are finding it exceedingly difficult to justify spending tens of thousands of dollars on streaming classes.