Objective AI Integration Will Strengthen Offerings But Economic Uncertainty Could Impact Outcomes

Key Takeaways

• Strategic focus on AI and subscription services is expected to significantly drive future revenue through higher margins and client retention.
  
• Advancements in monetization, enterprise solutions, and operational efficiencies aim to enhance revenue growth and profitability.
  
• Macroeconomic challenges and integration risks are contributing to cautious growth projections and potential revenue volatility for Upwork in 2025.

Catalysts

Operates a work marketplace that connects businesses with various independent professionals and agencies in the United States, India, the Philippines, and internationally.

• Upwork's strategic focus on AI as a growth catalyst is expected to significantly drive their future revenue. AI-related work has seen a 60% increase in gross services volume (GSV), and AI projects command higher hourly rates, which can lead to improved margins.
  
• The introduction and expansion of Business Plus and other subscription services are anticipated to increase revenue through higher client conversion rates and retention, positively impacting earnings as more clients adopt higher-value plans.
  
• The advancement of Ads & Monetization efforts is expected to continue driving take rate increases, directly impacting revenue growth, although at a more modest pace as the company optimizes its offerings.
  
• Continued focus on enterprise solutions, including managed services and a dedicated enterprise strategy, suggests potential for increased share of wallet within existing clients, spurring revenue growth despite macroeconomic challenges.
  
• Operational efficiencies from the organizational streamlining in 2024 are projected to enhance net margins and bolster profitability, setting the stage for achieving long-term margin targets.

Upwork Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Upwork's revenue will grow by 4.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 28.0% today to 15.7% in 3 years time.
• Analysts expect earnings to reach $139.4 million (and earnings per share of $0.96) by about March 2028, down from $215.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $177 million in earnings, and the most bearish expecting $103.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.6x on those 2028 earnings, up from 8.5x today. This future PE is greater than the current PE for the US Professional Services industry at 21.0x.
• Analysts expect the number of shares outstanding to grow by 1.89% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.92%, as per the Simply Wall St company report.

Upwork Future Earnings Per Share Growth

Risks

• The challenging macroeconomic environment is causing caution in revenue projections for 2025, with expectations that macroeconomic indicators such as JOLTS and other macro data, which remain at multiyear lows, could continue to impact revenue growth due to their 6
• to 9-month lag effect.
  
• There are concerns about top-of-funnel weakness, which has persisted despite some positive signals from the retained client base; this weakness could continue to affect overall GSV growth and thus impact revenue.
  
• The shift to more modest growth expectations in the Ads & Monetization and take rate improvement areas in 2025, compared to previous accelerated gains, indicates a potential deceleration in revenue streams from these segments.
  
• Despite the integration of AI and other strategic investments, reliance on the broader economic recovery for improvements, as the macro environment remains unpredictable, introduces risk to revenue and earnings projections.
  
• There is potential volatility in projections due to the integration of acquisitions like Objective AI and ongoing transitions in their service offerings that may have yet-unseen effects on net margins and operating costs.

Valuation

• The analysts have a consensus price target of $19.6 for Upwork based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $25.0, and the most bearish reporting a price target of just $18.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $888.3 million, earnings will come to $139.4 million, and it would be trading on a PE ratio of 24.6x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of $13.54, the analyst price target of $19.6 is 30.9% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.