Upwork Inc (NASDAQ:UPWK) Is A Work-At-Home Win You Should Avoid

Upwork Is The Gateway To Work-At-Home

Upwork Inc (NASDAQ:UPWK) is a company close to my heart. It was only what, 10 years ago I began my journey as a financial blogger and my first big breaks came through Upwork. Over the last decade, I have used the site almost daily, weekly for sure, earning a decent living in the process. I was excited to hear the company was going public, when it announced in mid-2019, and have tracked the company ever since but, right now, I don’t think it’s a buy.

When it comes to the pandemic, Upwork is yet another of those companies that should be perfectly positioned to thrive, grow, and emerge stronger. The company is a web-based platform connecting employers (clients) with contractors (freelancers). The platform provides access to virtually any kind of job possible to do over the Internet with services for both businesses and individuals. They even have a marketplace where freelancers can build their own business. I was not surprised to see the company post a strong performance in the second quarter.

“Our study found that 45% of hiring managers have frozen full-time hiring, and yet 72% are continuing or increasing their usage of independent professionals -- underscoring, the focus companies have today on cost management and workforce flexibility.”

Upwork Beats Consensus, But There’s A Red Flag Here

Upwork’s results are impressive. The company brought in just over $87.50 million for the quarter, an increase of 18.6% from the previous year and 890 basis points above consensus. The results were driven by notable strength in the Marketplace segment which grew a little shy of 19%. The take rate at Marketplace, or the number of users that act on an offer, increase to 13.7% or up 0.8%.

Strength in revenue carried through to the bottom line as well, on an adjusted basis at least. At the adjusted level EPS of -$0.03 beat by a nickel while GAAP earnings of -$0.09 were only in line with consensus. This raises a red flag because margins remained flat on a YOY basis and brings to mind a problem Upwork has with its workforce and billing.

When it comes to billing, it’s the new users and smaller jobs that pay the highest prices. And those prices have been rising. The last time they notified me, new jobs and jobs that have paid less than $500 get charged 20% of the fee. That’s a big chunk of change and a real deterrent to first-timers and smaller clients. From my experience, most freelancers will cut their teeth on those smaller jobs and 20% is a heavy monkey to carry around.

Not to mention antithetical to the company’s purpose. The longer-term clients and higer-paying gigs are no doubt a safer segment of business but in the end, generate lower revenue. To add insult to injury, freelancers with a proven history of work are in demand and easy to find without Upwork. There are lots of other ways to connect with clients, LinkedIn is only one, and Paypal is a heck of a lot cheaper.

The Technical Outlook: Now Is Not The Time To Buy Upwork

Shares of Upwork have been in an uptrend since hitting the March low and no wonder, the work from home vibe has it and many other stocks in rally mode. The problem for share prices now, though, is the run may be over. The 2Q report reveals that yes, Upwork is a stay-at-home winner but also that it has an underlying flaw cutting into profitability. Other work-from-home winners, winners like Logitech (NASDAQ:LOGI), are not having the same problems.

The news has shares down more than -6.0% in early action and in danger of breaking support. Support is at the previous post-pandemic high and a likely place for the bears to try taking a swipe. The indicators don’t lend much to the picture, over the past three months both MACD and stochastic have been diverging from the rally in a sign of weakness. If that weakness results in a move below and confirmation of resistance (at the $16.50 level) a much deeper move could be in store. I would not be surprised to see Upwork stock move down to the $14.00 or even the $12.00 level over the coming months.