Post-IPO Upwork Stock Could Offer a Path to Play the Freelancer Market

UPWK stock - Post-IPO Upwork Stock Could Offer a Path to Play the Freelancer Market

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When the freelancer marketplace Upwork (NASDAQ:UPWK) pulled off its initial public offering in early October, the timing was spot-on as the IPO market had been on a nice run. On the first day of trading, UPWK stock shot up 41.2%.

But of course, things would soon cool off because of a tailspin in the markets. Although, even with the selling pressure, UPWK stock is still up a respectable 25%.

What do investors see in Upwork? Where is the opportunity in a company that is not a new-fangled digital operator?

Roots in Dotcom Days

The roots of Upwork go back to 1999, when three co-founders started Elance. The company would go on to grow at a strong pace and continue to innovate. And by 2013, Elance would then merge with rival oDesk. These companies would rename their business Upwork.

The company now operates the largest online marketplace for finding freelancers. For the 12 months ended June 30, the gross services volume (GSV) was $1.56 billion from about 2 million projects in more than 180 countries.

Marketplaces are certainly tough to create. There needs to be the right balance between supply and demand. There also must be tremendous scale. But when these factors hit critical mass, there can be huge advantages, especially with network effects.

According to UPWK’s IPO prospectus, management believes “…our platform provides a strong value proposition for both sides of our marketplace and our scale creates powerful network effects that strengthen our competitive differentiation. Clients are attracted to our unique platform due to the availability of the more than 5,000 skills that freelancers offer in over 70 categories. In turn, as more clients use and post projects on our platform, we are able to attract more freelancers.”

Whew! Buzzwords aplenty, but focus on network effects, something that’s been critical for some of the world’s most successful companies. Just look at Alibaba (NYSE:BABA), Facebook (NASDAQ:FB) and (NASDAQ:AMZN).

And in Upwork’s case, network effects happen via a platform that offers many compelling benefits for its customers that go well beyond providing access to freelancer talent. For example, there are tools for collaboration, invoicing, payment processing (with support of multiple currencies) and project management. There are also features to rate freelancers — which has been critical for building trust with the marketplace.

In the meantime, the market opportunity is big. Based on Upwork’s own analysis, the global GSV was about $560 billion last year. And the market is likely to continue to grow, as it gets tougher to find skilled talent while more people want flexible schedules.

Bottom Line On Upwork Stock

Various Wall Street analysts are fairly upbeat on the prospects for Upwork stock. RBC Capital’s Mark Mahaney has a $24 price target on the shares and Citigroup’s (NYSE:C) Mark May has a $23 target, so between them, there’s upside of 27% to 31%. These analysts note that Upwork has a strong position in the market and that there are powerful secular trends. For what it’s worth, Mahaney is consistently one of the top-ranked analysts on fintech site Tipranks, currently #34 out of the 4,887 analysts that the site tracks.

Yet not everyone is so upbeat. Look at Jefferies analyst Brent Thill and Stifel’s Scott Devitt, who both have put a hold rating on UPWK stock. And why? Well, the nagging issue is that the growth rate is far from impressive, at roughly 20%. Let’s face it, in light of the market trends, shouldn’t it be much higher? For comparison purposes, Thill holds the #45 spot on Tipranks.

This seems reasonable, especially since a variety of other recent IPOs have much stronger growth profiles, including Docusign (NASDAQ:DOCU) and Zuora (NYSE:ZUO). Besides, Upwork stock is not cheap either, with the price-to-sales multiple at over 8X. So, for now, it’s probably best to hold off since there are better opportunities right now in the IPO market.

Tom Taulli is the author of High-Profit IPO StrategiesAll About Commodities and All About Short SellingFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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