Like much of the tech sector, Upwork (NASDAQ: UPWK) shares boomed during the pandemic but have cratered since then.
The online freelancer marketplace saw strong growth during the global health crisis as out-of-work Americans looked for new employment and companies in need of remote workers turned to tech-centric platforms like Upwork.
While Upwork is best known as a platform for finding work and hiring workers, the company is increasingly staking its future on artificial intelligence (AI).
Image source: Getty Images.
What Upwork is doing with AI
The launch of ChatGPT a year ago sparked a new technology revolution in generative AI, the kind of technology that can create text and images, and tech companies have raced to develop and monetize the new technology.
As a company based on connecting employers and employees, Upwork is at a unique crossroads with generative AI and is aiming to capitalize on ramping up demand for AI talent.
In July, the company launched a new AI service hub that connects employers looking to hire with AI-focused talent. It also offers several partnerships with leading AI platforms including OpenAI, in which it's providing OpenAI experts for projects like building apps powered by large language models, improving models, and developing chatbots.
Among the categories of AI assistance Upwork offers are advice on using AI to transform your business, building a custom chatbot, creating generative AI art, and reviewing AI-generated written content.
Earlier this month, Upwork announced a new suite of generative AI apps and educational content, partnering with companies such as Adobe, Amazon, Coursera, and Udemy, which will help Upwork talent get the training and working resources they need to boost productivity and automate tasks.
Upwork CFO Erica Gessert sees the company's growing network of AI partnerships as a competitive advantage. In an interview with The Motley Fool, she said, "All these partnerships make us a totally unique environment within the freelancing or even alternative workforce environment."
The company is likely to build on those partnerships, as AI is now its fastest-growing employment category.
A renewed focus on profitability
AI isn't only the area the company is focused on. Upwork has also significantly improved profitability, largely because of cost-cutting and increased efficiencies.
In the third quarter, Upwork reported revenue growth of 11% to $175.7 million, but it flipped a $24.8 million loss on generally accepted accounting principles (GAAP) in the quarter a year ago to a $16.3 million profit, or a 9% profit margin. On the basis of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), the company reported a profit of $31.2 million, up from a loss of $2.9 million in the quarter. Both GAAP net income and EBITDA were records for the company.
In addition to a modest improvement in gross margin, the company achieved that profit surge by cutting back on brand-marketing spending, as the company wasn't confident it could convert the increased brand awareness into revenue in the current economic environment, according to Gessert. Meanwhile, Upwork expects to continue to grow profit margins by identifying new efficiencies and other areas where it can make cost cuts.
Is Upwork stock a buy?
Upwork's fourth-quarter guidance indicates that it expects the trends that carried it to record profits in the third quarter to mostly continue, calling for revenue of $175 million to $180 million, representing 10% growth. On the bottom line, it sees adjusted EBITDA of $24 million to $28 million and adjusted earnings per share of $0.16-$0.18. That's down modestly from the third quarter, but represents strong year-over-year growth.
Upwork hasn't yet given 2024 guidance, but the stock seems to have a lot of upside potential right now, trading at a price-to-earnings ratio of 20 based on 2024 estimates. While I'd like to see its forecast for next year before calling the stock a buy, Upwork has a lot of room to run if it can harness the growth potential in AI and benefit from an eventual rebound in the economy. Down more than 77% from its pandemic-era peak, the worst of the sell-off now seems well behind the company.
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