Upwork is Monday's IBD Stock Of The Day. The leading online platform for freelance work gears up for a strong 2024 amid growing demand for artificial intelligence work and an increasingly likely soft landing for the U.S. economy. Upwork stock, riding an updraft after last Wednesday's dovish Federal Reserve meeting, cleared a buy point in today's stock market action.
Fed Shifts Focus To Avoiding Recession
Like most staffing firms, Upwork's business is sensitive to labor market trends. That is particularly true for job openings, which are still coming down, though more gradually. The good news is that the Fed has shifted its focus to making sure it doesn't hold monetary policy too tight for too long. Risk of an economic downturn has largely dissipated. The S&P 500 is hitting a new high, the 10-year Treasury yield is falling below 4%, and markets are pricing in 1.5 percentage points of rate cuts next year.
Upwork Stock: Pricing Change Provides Tailwind
Upwork also has a lot that sets it apart from its industry group. The San Francisco-based outfit generated $175.7 million in Q3, up 11% from a year ago. That growth came even as gross services volume — the total value of work conducted on the platform — was flat at $1.03 billion. The flat volume, in part, reflected tech-sector layoffs in late 2022 and early 2023, which contributed to roughly flat wages paid via the Upwork platform.
So where did the revenue growth come from? Upwork's take rate, the percentage it gets of the pay received by its freelance army, rose to 17.1% from 15.4%.
A couple of things are behind that increase. Last spring, Upwork adopted a flat-fee structure, which lowered its take rate for small projects, but doubled its take rate for big ones, from 5% to 10%. The shift has been gradual, with the higher rate imposed only after current work stints end. The shift will be complete at the start of 2024, which should give a further lift to the take rate.
In a Nov. 29 presentation at the UBS Global Technology Conference, CFO Erica Gessert said that any turnover in freelancers stemming from the higher take rate has been "probably a little bit less" than Upwork foresaw.
Upwork's Profit Surge
Another factor lifting Upwork's take rate has been ad-related products that allow freelancers to highlight their interest in and availability for specific projects.
Upwork's moderate revenue growth translated to a huge increase in profitability. Q3 earnings per share vaulted to 20 cents from a year-ago loss of 3 cents. The key: Operating expenses accounted for 59% of revenue, down from 78% a year ago. While R&D expense grew 16%, sales and marketing expense fell 26%. That reflected a 15% reduction of full-time workers and nearly eliminating its brand-advertising budget.
"We made significant progress on our goal to become the preeminent destination for AI-related talent and work," Upwork said in its Q3 letter to shareholders. The company launched an AI Services hub in Q2 and recently announced an expansion, including training resources from Coursera, Asper and Udemy.
Upwork Stock
UPWK stock rose 4.5% to 15.48 in Monday afternoon stock market action. That carried Upwork stock past a 15.00 buy point from a handle formed on a cup base. The top of the handle came intraday on Nov. 8, following the release of Q3 earnings and news of its expanded AI resources.
Upwork stock is ranked No. 2 in the Commercial Services-Staffing industry group by IBD Stock Checkup based on fundamental and technical factors.
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