Upwork Inc.'s (NASDAQ:UPWK) Price Is Right But Growth Is Lacking After Shares Rocket 32%

Despite an already strong run, Upwork Inc. (NASDAQ:UPWK) shares have been powering on, with a gain of 32% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 85% in the last year.

Although its price has surged higher, Upwork's price-to-earnings (or "P/E") ratio of 10.6x might still make it look like a buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 20x and even P/E's above 35x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

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Upwork certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Upwork

Keen to find out how analysts think Upwork's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For Upwork?

In order to justify its P/E ratio, Upwork would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 233% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Shifting to the future, estimates from the eleven analysts covering the company suggest earnings growth is heading into negative territory, declining 17% per year over the next three years. That's not great when the rest of the market is expected to grow by 11% per year.

In light of this, it's understandable that Upwork's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Upwork's P/E?

The latest share price surge wasn't enough to lift Upwork's P/E close to the market median. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Upwork's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Upwork that you should be aware of.

You might be able to find a better investment than Upwork. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.