Upwork looks like another unicorn IPO in the making

By Rohit Kulkarni, SharesPost

Upwork, an online platform that connects companies with freelancers, recently said it plans to go public on Nasdaq under the ticker UPWK.

The company, the product of a merger between Elance and oDesk in 2014, helps everyone from the Fortune 1000 to small business clients find competent freelancers with skills in marketing, website design, copy editing, programming, and project management.

Major investors include Benchmark, Jackson Square Ventures, Firstmark Capital, Globespan Capital Partners, Stripes Group and T. Rowe Price. Once valued at $700 million, Upwork will likely hit a unicorn valuation at IPO, thanks to a strong economy, robust job growth, and investors’ enthusiasm this year for tech IPOs.

Last year, Upwork generated $200 million in revenue, a 23 percent jump from the prior year. If Upwork maintains this growth rate, the firm should approach $300 million in revenue next year.

We believe institutional investors would feel comfortable applying a mid-single-digit EV/Revenue multiple. Therefore, the market could value Upwork over $1.5 billion on IPO, more than doubling in value since 2014. All in, we expect another Unicorn would be soon minted in the public markets.

The Upside Scenario:

Strong growth with room to run: Upwork grew revenue by an impressive 28 percent in the first six months of 2017 compared to the same period a year ago. The gross services value (GSV) of services acquired on its platform jumped roughly 19 percent to $1.37 billion in 2017 from $1.15 billion in 2016. Upwork’s GSV accelerated in 2018 and is on track to exceed $1.67 billion this year (annualizing 1H:2018 numbers).

We can attribute this revenue growth not just to deal volume, but also to an increase in the amount of money it collects from each contract. According to SEC filings, the company estimates its addressable GSV market at $560 billion a year, which translates into just a 0.2 percent market share. The key question is whether an IPO pushes Upwork’s market share higher. We believe it’s definitely possible.

Source: Upwork form S-1, all values annualized; SharesPost Research.

Innovative platform with improving path toward profitability: While the company has yet to produce positive net income on a consistent basis, it intends to pay down $19 million in debt with some of the IPO proceeds. The rest will be devoted to sales and innovation, including machine learning. Upwork hasn’t consistently posted large adjusted EBITDA gains, but the company has demonstrated it can do so. EBITDA margins improved to almost 4 percent last year from less than 1 percent in 2016. We’re likely to see EBITDA margins decline this year because the company is spending heavily on innovation and new products.

High Net Promoter Score is a key leading indicator of customer loyalty and future stickiness: Overall, people using Upwork are pleased with the platform. The company boasts a Net Promoter Score, based on a scale from -100 to +100, at 60+ in 2017 and during the first six months of 2018. This strong degree of customer satisfaction will pay off in the future, particularly as the company seeks to reduce sales and marketing spend.

Proven hiring efficiency and reach: Upwork’s most compelling attribute is the speed and breadth it provides to clients. According to the filing, it takes a company on the Upwork platform an average time of 23 hours to identify, hire, and onboard a freelancer versus 31 business days for a company using traditional means. Upwork also boasts an extensive network of 375,000 freelancers representing 5,000 unique skills in over 70 categories.

The Downside Risks:

Employee vs. contractor classification issues: Are freelancers on Upwork considered employees for tax, benefits and other purposes? Similar to other ‘sharing economy’ companies, Upwork may face backlash if government agencies or regulators consider its freelance workforce as employees. Such an action would increase costs and significantly slow the company’s growth.

Annual losses pile up: Upwork hasn’t turned a yearly profit since its formation and likely won’t for the foreseeable future. The firm’s increased investment in innovation has hurt its bottom line. Upwork recorded a net loss in the first six months of the year compared to positive net income during the same period a year ago.

Untested platform and pricing model: Unlike those of other companies with upcoming IPOs, Upwork’s platform is relatively new – only three years old. The company has yet to experience a market correction or an economic downturn. Upwork has yet to prove its new pricing model, which it rolled out in 2016.

Competition: Upwork currently faces competition from more traditional staffing providers, such as Robert Half and Adecco, and job boards, as well as other internet platforms. The most notable tech-savvy competitor is Microsoft, which spent $26.2 billion to acquire LinkedIn, now one of the world’s most powerful platforms for connecting companies and workers.

Rohit Kulkarni is a managing director and head of research at SharesPost Inc.