Upwork (NASDAQ: UPWK) is a technology firm that operates as an online marketplace, connecting freelance workers and independent contractors with employers. In 2024, the stock price is down 29% due to fears that AI will eliminate many freelance jobs. Now, most analysts covering the stock have a buy rating on it. Let's look at Upwork's business lines and recent financial results. We'll also explore fears about AI hurting the freelance work model and give an outlook on the firm.

Detailing Upwork's Business Model and Revenue Generation 

On its annual filing, Upwork calls itself “the world's largest work marketplace.” It measures this using gross services volume (GSV). GSV represents the total amount those looking to hire (clients) spend on the firm’s offerings, plus fees charged to those looking for work (talent). The firm enabled $4.1 billion of GSV in 2023, 94% of which came from the United States.

The primary form of revenue generation is by deducting a percentage of the talent's pay. The company usually deducts 10% from the contractor's payment.

The company has two offerings directed at clients: Marketplace and Enterprise. Marketplace gives clients access to the site's basic hiring features. Enterprise provides larger clients with more resources to help scale their business using growth and cost-efficiency strategies. They assign dedicated billing, account management, and business analytics teams to clients to drive these strategies.

Two other important points of note: In May 2023, Upwork fired 15% of its employees, mostly in its sales department, and its main competitor is Fiverr (NYSE: FVRR).

Upwork Q1 2024 Earnings: EPS and Revenue Beat, Shares Volatile Despite Strong Metrics

Upwork released its Q1 2024 earnings on May 1, 2024. It beat on both earnings per share (EPS) and revenue.  EPS came in at $0.13, two cents above estimates. Revenue came in at $191 million, $5 million above estimates. The share price surged, climbing by almost 9% in a single day. Yet, optimism quickly faded. By the next week, the gain disappeared, and since that release, shares have dropped by 11%. GSV grew 1%, and revenue grew 19% from the last year.

However, the firm’s “take rate” is the most encouraging metric. The firm provides this custom metric, which is defined as the total revenue divided by the total GSV, with minor adjustments. The take rate shows the margin the firm brings in on the value that its clients generate. The take rate for Q1 was 18.9%, which increased 2.9% from the previous year. This is a large expansion in the company’s margins, which is very encouraging. The company also increased the number of active clients on the platform from the previous year by 5%.

Upwork Should Overcome Gen-AI Headwinds

Seeing Upwork’s dramatic price drop over the last year is somewhat puzzling. The share price is up only 6% from Aug. 2, 2023. The S&P 500 is up 22% over the same period. This is despite the firm actually becoming profitable since then, reporting positive earnings over the last three quarters. The stock traded at much higher levels in 2022 when its earnings were negative. Shares are down 52% since July 4, 2023. This is due to concerns about generative AI’s effect on the company, which has driven its shares down while driving the market up.

Opinions about how AI will affect the freelance work model vary. AI will cut many jobs that require low-skill and repetitive work. A recent study showed that since the introduction of Open AI's ChatGPT, job postings for "automation-prone" freelance work dropped 21%. This was particularly pronounced in writing, coding, and image creation. However, the remaining jobs required higher skill levels and paid freelancers more. Although many jobs will be lost, other jobs with different skill sets should replace them.

While concerns about Gen-AI are understandable, Upwork's recent results don’t lie. It doesn’t make sense for the firm to be trading at over 50% less than when it was severely unprofitable. The firm showing its ability to increase its take rate substantially and increase active clients in the face of Gen-AI headwinds makes this even more head-scratching. Analysts agree. The average price target of analysts covering the firm that updated their ratings since Q1 earnings comes in at $17.50, implying a 66% upside.