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Hi all, new VIC member here. I've learned a lot from many VIC members over the years and am very grateful for this community. I look forward to getting to know you all better.

I am pitching UPWK as a Long with a price target of $100/sh or 160% upside (20% 5-Yr IRR) from here, with downside protection and an attractive risk-reward skew.

Executive Summary: 

• UPWK is experiencing TAM inflection, accelerating growth, and a widening moat that leads to underappreciated earnings power

• CEOs are now highly comfortable with and are adapting to a world where remote work is here to stay. UPWK has only 1% share of a $300-500bn TAM that has low-single-digit online penetration. New clients are onboarding on UPWK at a record pace

• UPWK does ~$4bn of Gross Service Volume (GSV) and has achieved escape-velocity as the largest scale freelance marketplace by nearly 4x, resulting in network effects, strong talent diversity and scale, the best match rates, and client & freelancer trust-and-safety that culminate in a virtuous flywheel with repeat usage. Furthermore, workflow SaaS tools are making UPWK even stickier, with unit economics (18 month paybacks) and S&M efficiency rapidly improving

• UPWK ($4.6bn TEV) currently trades at 7.0x 2022E Revenue for 32% 3-yr Rev CAGR, ~115% net revenue retention, and 30% steady-state EBITDA margins. I arrive at a 2025YE price target of $100/sh for 21% IRR (2.6x MoM) on 40x FCF / 27x EBITDA 

• M&A provides downside protection, as UPWK is a highly strategic asset for large software vendors addressing the HR space and/or serving small and midsize companies (e.g. MSFT, CRM, WDAY). UPWK is building an HR platform for the future of work e.g. a combination with LinkedIn would be highly synergistic

Company Overview: Upwork is a two-sided online talent marketplace serving SMB clients and F500 enterprises, changing the way businesses hire and manage freelance knowledge workers. Engagements range from $100 to $100K in popular categories such as design/creative, customer support, mobile dev, marketing, and admin support. Freelancers provide 8,000 different skills and are primarily white-collar knowledge workers with >80% with a college degree. Freelancers receive an avg project feedback rating of 90%, and UPWK’s NPS scores from clients and freelancers are >60 (vs 4 for traditional staffing agencies). UPWK also provides workflow SaaS tools incl: payroll/billing, secured escrow, approval tools for hiring managers, contracting tools, time tracking, file & code sharing, security verification, tax reporting, compliance management, and integrations e.g. Citrix, MSFT Teams, Zoom, Okta SSO. UPWK generates revenue via subscription fees and % take-rate on Gross Service Value (GSV), billed to both clients & freelancers. Expert calls suggest UPWK pricing is 30-50% less than that of traditional staffing agencies that are notorious for poor price transparency. Enterprise clients (defined as >250 employees) are ~10% of revenue and enjoy higher take-rates, faster growth, and net revenue retention of >125%. Clients include Airbnb, GE, Samsung, Microsoft, and Google. 

Why does this opportunity exist?

• Under-covered SMID-Cap. Bulge bracket banks such as GS, MS, JPM, CS, BAML, UBS, DB, Barclays do not cover the stock

• Lack of transparent segment financials. UPWK does NOT break out its Enterprise Plan vs SMB segments. While the former is only ~10% of Revenue, it is growing faster with >125% net retention. Investors have poor visibility into an important change in mix 

• Net revenue retention metrics also experience a 12-month lag, again poor transparency into the current trajectory of the business. In Nov ’20, UPWK announced a 1H’21 Analyst Day in which new metrics and disclosures will help prove out my thesis

• UPWK falls into the “covid-beneficiary” and “high-growth / unprofitable tech” baskets, the entire group of which has been sold indiscriminately as part of factor rotations and/or macro trades

Investment Thesis

1. UPWK has only 1% share of a large and underpenetrated $300-500bn TAM. Covid has dramatically accelerated the secular shift to remote work, breaking down the single biggest barrier to Upwork adoption for mid-market and enterprise clients

1. Clients’ skeptical attitudes towards remote freelance work, the #1 barrier to Upwork adoption, has flipped 180 degrees and is now Upwork’s greatest asset, driving record new client wins and 70% growth in brand awareness and relevancy

2. Total core clients grew 18% yoy, with net new core clients up 61% yoy and 4 consecutive qtrs of growth acceleration

3. Freelancers account for 35% of the US workforce, and remote knowledge workers are expected to grow 90% to 36mm by ’25, driven by long-term pre-covid trends towards greater workplace autonomy, flexibility, and 9-to-5 alternatives

4. Freelancing is a compelling way for companies to hire & retain talent. If you don’t, competitors will

2. Why is UPWK winning and will continue to win? UPWK’s network effects yield the highest match-rate, best service, and platform trust, while workflow SaaS makes it highly sticky. UPWK is by far the #1 leader with the deepest talent bench

1. The key to successful marketplaces is acquiring increasingly profitable cohorts of customers who are loyal repeat purchasers (and ideally for free via organic SEO / viral word-of-mouth)

2. Upwork attracts clients in a virtuous cycle, as more usage leads to better data to drive better matches. Customers value the ability to source talent for a wide variety of jobs and to do so quickly. Thus, the depth and breadth of UPWK’s talent network directly affects the rate at which UPWK can successfully match a freelancer to a job

3. Workflow SaaS creates significant value for both clients and freelancers by adding convenience, compliance, and productivity improvements

4. Product innovation is impressive. New products such as “BYOT” (Bring Your Own Talent) and “Payroll” (Employer of Record) are driving client demand for vendor consolidation onto 1 platform and is part of UPWK’s strategy of expanding into a broader talent management platform

5. Unit economics have significantly improved as net revenue retention has increased from 102% to 118%, churn has decreased, and customer acquisition costs have declined. SEM-acquired new clients grew 113% in 1Q’21. Similar to Airbnb, 80% of Upwork clients come from non-paid channels such as word of mouth, unpaid search, and free referrals

3. UPWK’s enterprise segment, which I estimate is growing ~50% yoy, enjoys net revenue retention >125%. We are in the first inning of an important mix-shift that will accelerate growth and improve underlying business quality

1. UPWK has already demonstrated product-market-fit with enterprise clients who are experiencing surging demand. New client wins and top-of-funnel inbounds are at all-time-highs. After seeing the success of its enterprise plan, UPWK announced in 3Q’20 that it is re-investing more aggressively in its enterprise sales force 

2. Enterprise investments experience a “lag” due to: 1) new client onboarding, 2) time for client spend to ramp, and 3) time for new sales reps to ramp. UPWK grows via “land-and-expand” by first getting adoption in one job category in one team and gradually expanding within that org and then across other orgs, as clients outsource increasingly more jobs. Thus, the benefit from near-term wins won’t show up until 2H’21 and 2022

4. Valuation: UPWK trades at 7.0x 2022E Revenue and 3.8x ‘25, despite attractive unit economics with new client payback at 18 months (and improving). The latest cohorts are spending at a faster pace, and management is doubling down on S&M

1. S&M is highly efficient at 0.8x (80c of new ARR per $1 of S&M spend). Efficiency is improving as marketplace network effects lower CAC through organic word-of-mouth/SEO e.g. in 3Q’20, client sign-ups from SEO grew 90% yoy

2. Street numbers are too low. I am ~10-15% higher vs Street Revenue estimates, as the market is missing the growth acceleration story due to TAM unlock and net retention lift. UPWK has beat-and-raised each of the last three quarters

3. Current Valuation offers a highly attractive risk-reward skew. I arrive at a “Base Case” ‘25E YE Price Target of $100/sh (+160%), assuming 26% Rev CAGR and a 40x FCF exit multiple. Downside case of $28/sh (-26%) assumes rapid growth decel to 11% CAGR (very unrealistic slowdown) and 25x FCF / 3.5x Revenue. The Upside case arrives at $147/sh (+285%) assuming 33% Rev CAGR and 40x FCF exit

4. UPWK has de-rated significantly despite exceptional quarters of accelerating growth, increased user penetration, and improving unit economics. UPWK is down -30% vs the median historical multiple and trades at the lowest level year-to-date Furthermore, UPWK trades at 9x 2022 Gross Profit for 32% 3Y Rev CAGR and 46% “Rule-of-40”, far below public comps including consumer marketplaces and SMB-oriented software

5. Note: 2021 is substantially de-risked, as I expect 2021 to achieve record yoy growth due to 2020 pipeline build-up

5. M&A provides downside protection. UPWK is a highly strategic asset for large enterprise (MSFT, CRM, WDAY) and SMB software vendors (SHOP, SQ, INTU), as UPWK is building the HR platform for the future of work. LinkedIn could be a very synergistic fit. Furthermore, Project Catalog (a FVRR-like offering that beta launched in 3Q’20) is another call-option

1. M&A: LinkedIn has tried to build its own marketplace without success, having launched ProFinder in 2016 and Open for Business in 2019, both of which connect LinkedIn members with each other for freelance services. A LinkedIn combination would be highly strategic, as UPWK would benefit from a) LinkedIn’s social graph, which has high fidelity and is community-verified (helping onboard top freelancers faster), and b) MSFT’s enterprise relationships

Risks

• Management execution. This is a highly operationally intensive and execution-driven business 

• A labor marketplace is intrinsically more complex and difficult to build as compared to marketplaces for tangible goods or even well-defined services such as ride-hailing / home-sharing. UPWK not only has to source and increasingly scale its talent pool, but also match talent to client job postings at better rates

• Revenue growth could be slower than expected. Success partially depends on behavioral change that has inertia i.e. businesses must feel comfortable hiring freelancers AND top quality workers must become freelancers

• UPWK’s Enterprise Plan segment is more akin to running a quota-based sales org, which is a different go-to-market motion compared to its SMB segment 

• Covid recovery is faster than expected and businesses resort back to pre-covid norms. It is unknowable how much of UPWK’s new business is truly one-time

• Tech-rotation: high-growth tech is down ~15% over the last 7 trading days, despite UPWK’s exceptional earnings results. In the short-term, the rotation could get worse before it gets better

• New entrant builds a better product and gains mindshare/brand before UPWK achieves critical mass e.g. LinkedIn, FVRR

• A quick note on Fiverr (FVRR)

• While some may point to FVRR as a competitive threat, expert calls suggest FVRR serves a vastly different use case. FVRR’s fixed price business model is especially convenient for small/micro-businesses and even consumers hiring for simple well-defined gigs. UPWK clients spend on average ~$800/yr (with many spending >$10K), while FVRR buyers spend ~$200/yr on average. Furthermore, 85% of UPWK projects are long-term and more complex in nature, while FVRR jobs are simple and low-touch. Thus, Fiverr’s model has less user-friction and is easier to scale, as freelancers list their services just as an Amazon seller would. However, UPWK’s business model enjoys stickier customer relationships, longer-term projects, and thus greater revenue visibility / customer expansion opportunity with increasingly larger corporate clients

• Nevertheless, both companies are starting to encroach on each other’s turf, as UPWK announced Project Catalog to supplement its existing business and FVRR is moving upmarket as well. I believe both companies will be successful. The combined market cap is miniscule compared to the broader TAM, and competition will likely drive increased technology penetration benefitting both players

---Exhibits---

Company Investor Presentation

Exhibit 1 Relative Valuation: UPWK trades at 9x 2022 Gross Profit for 32% 3Y Rev CAGR and 46% Rule-of-40, far below public comps including consumer marketplaces and SMB-oriented software

Exhibit 2: UPWK has de-rated significantly despite exceptional quarters of accelerating growth, increased user penetration, and improving unit economics. UPWK trades at 8.5x NTM Revenue, -30% vs the median historical multiple and -50% vs highs, the lowest level year-to-date

Note: 3Q’20 earnings resulted in a permanent re-rating that changed the equity narrative. Comparing today’s multiples with prior multiples could lead to a misleading conclusion

Exhibit 3: Street is missing the acceleration in net revenue retention. The current metric experiences a 12-month lag and lacks real-time insight. UPWK will release new metrics during the June 2021 Analyst Day that I believe will be clarifying and a strong positive for the market

Catalyst

• UPWK’s first Investor Day in Jun-2021 will reveal new KPIs offering greater clarity on the underlying fundamentals. Metrics could show the rapid improvement in net revenue retention, more disclosure on ‘Enterprise Plan’, and/or new long-term guidance

• Bulge-Bracket Wall Street banks initiate coverage with Buy ratings and/or Analysts upgrade in 2021

• Revenue growth accelerates faster than Street expectations

• UPWK has beat and raised each of the last 3 quarters (and consistently beaten my numbers). I am 10-15% above Street Revenue estimates

• Record new client wins and top of the funnel inbounds accumulated from 2H’20 will drive growth inflection in ’21. This is already playing out in 1Q’21 with 41% yoy GSV growth

• Client Spend Retention improves to my estimate of 118% for FY21, compared to mgmt’s historical guidance of 98-100%

• Project Catalog, a highly complementary product to UPWK’s core offering, takes off. FVRR’s success has already proven product market fit

• Investors realize UPWK’s revenue lift is not one-time but actually permanent, as remote work has accelerated and tech penetration of freelance labor has been pulled-forward

• Acquisition by a strategic (see above)