Upwork Vs. Fiverr: Who Stays Ahead?

May 20, 2019 8:21 AM ETUpwork Inc. (UPWK)FVRR11 Comments10 Likes
Niki Schranz profile picture
Niki Schranz


  • Upwork hasn't been a good performer since its day 1 IPO pop.
  • Since then, the company has reported earnings three times, failing to impress the market. Especially the last report (Q1 2019) has seen considerable deceleration in growth, which left investors worried.
  • Fiverr, a competing online freelancer platform, has recently filed for an IPO, raising the question of how this could impact Upwork.
  • This article looks into Upwork's recent earnings reports, its new product initiatives, and also tries to size up the possible competitive threats coming from Fiverr.

When I wrote about Upwork (NASDAQ:UPWK) in November last year, the company known for connecting freelancers and businesses through its online platform was showing some ambiguous traits:

  • It was operating in an important and growing industry with a substantial market opportunity – although, on further inspection, the addressable market turned out to be considerably smaller than advertised by the company.
  • It had the potential of strong network effects through its platform business model - however, the leader in the fragmented market for connecting freelancers and businesses seemed far from established.
  • It showed healthy top line growth in the low 20s, but barely outgrowing the overall market raised question marks as to the ability of Upwork to gain substantial market share.
  • The company's expanding gross margins in the high 60s suggested a potential for high profitability in the future - yet, profitability seemed to be far off, and a seemingly high fee structure could indicate competition and margin pressure going forward.

Two earnings reports have been released since my critical writing, and especially the most recent report (Q1 2019) elicited rather muted reactions from Wall Street - shares are currently trading around all-time lows.


Data by YCharts

A Quick Earnings Report Recap

It's no wonder: Revenue growth, which at this point is essential to the success of this stock, decelerated from 23% in Q4 2018 to only 16% in Q1 2019. More importantly, the company didn't raise its full-year revenue guidance for 2019, still expecting $304 million in revenue at around breakeven adjusted EBITDA. That would represent 20% yoy growth in 2019, down from 25% in 2018. In a world where Wall Street expects growth companies to consistently upgrade their growth targets - and you must assume that Upwork is trying to do just that - it bodes well for neither the stock nor the business.

Should we question the 20% revenue growth target for 2019, since the company just came in at 16% growth in Q1 2019? In the conference call, management explained that in order to maximize the CAC-to-LTV ratio, marketing investments are spread through the year, which leads to a progressive acceleration of the business. That sounds like a reasonable explanation, and since the company grew sales and marketing expenses by only 4% yoy in Q1 2019, it also seems to be backed by the numbers.

One positive takeaway from the recent two earnings reports was core clients growth, which steadily increased by 22% yoy in the past three quarters (reaching a total of 111,000 in Q1 2019), while showing healthy spend retention at 107%. A little less positive is gross services volume (GSV) decelerating to 21% growth in Q1 2019 from 28% growth in 2018. Seeing these two metrics in connection, it could be a sign of clients decelerating their spending, which is not ideal and a trend worth watching going forward.

On the profitability side, Upwork is still hovering around breakeven - adjusted EBITDA was $1.2 million in Q1 2019 and, as already stated, isn't expected to improve for the full year. Gross margins continue to march upwards, coming in at 69% in the most recent quarter, while the take rate (revenue divided through GSV) slightly ticked down to 14.2% (compared to 14.3% in the fourth quarter of 2018 and 14.7% in the first quarter of 2018).

All in all, these quarterly report numbers evoke a rather lukewarm reaction in me - and Wall Street seems to agree.

Competition Heating Up?

Adding insult to injury, the competition seems to be creeping up on the company. As already stated in my previous article, Upwork is the market leader in a very fragmented market. The two biggest online platforms for connecting freelancers to businesses next to Upwork, and thus, the company's biggest direct pure-play competitors, are Australia-based Freelancer.com (OTCQX:FLNCF) and Israel-based Fiverr (FVRR) .

Freelancer.com, despite touting itself as the world's largest freelancing and crowdsourcing marketplace by the number of users and projects, is actually the smallest of the three with A$170 million GPV achieved in 2018 (around $117 million) and, as its 2018 annual report reveals, has been experiencing some growing pains in recent years:

Source: Freelancer.com's 2018 annual report

Despite Freelancer.com's catchy domain name, it seems that it has already been left behind - Upwork's GSV was around 15 times higher in 2018. Since splitting the company's resources between the Freelancer.com business and another online business acquired in 2015 (Escrow.com), its freelancer business segment has basically stopped growing. Incidentally, 2015 was also the year when the Upwork brand was created.

Much more interesting, though, is Fiverr, which has just filed for an IPO to raise $100 million. The company's resume looks a lot more impressive than Freelancer.com's.

In the twelve months ended March 31, 2019, Fiverr served approximately 2.1 million active buyers (i.e., clients, in Upwork lingo) and 255,000 active sellers (i.e., freelancers) from over 160 countries across the globe, reaching a GMV (Gross Merchandise Volume - the equivalent of GSV) of $293.5 million in 2018 (up 38% from 2017).

It generated $75 million in revenue in 2018, growing around 45%. That growth has come down slightly to 40% in Q1 2019; projecting 40% growth out for the full year, the company is looking at $105 million in revenue in 2019 - about 3 times smaller than Upwork's target revenue for 2019.

Interestingly, Fiverr had a take rate of 25.7% in 2018, more than 10% higher than Upwork's (which also explains Fiverr's higher gross margins). That suggests that my past assessment of Upwork's fees being rather high was maybe wrong, and with that my concern over new competitors undercutting it and pressuring margins. Also, as a result, the differential between Upwork's and Fiverr's GSVs (or GMVs) was even higher than the differential of their revenue bases: $1.76 billion for Upwork versus $293.5 million for Fiverr in 2018 (or 6 times higher).

It is quite clear that Upwork has a significant scale advantage over Fiverr at the moment, which should make Upwork's network more valuable than Fiverr's.

Furthermore, Fiverr incurred $36 million in net losses in 2018 from the aforementioned $75 million in revenue (a whopping 48% negative net margin). In the most recent quarter, Fiverr spent 64% of revenue for sales & marketing, compared to 30% of revenue for Upwork. In other words, Fiverr is paying a heavy price for its higher growth rate, which could explain why the company is trying to get $100 million from public investors.

Upwork's scale advantage means that it can outspend Fiverr on sales & marketing and research & development, which should help it stay ahead of the curve going forward. For example, Upwork was able to spend double the amount in R&D compared to Fiverr in the first quarter of 2019.

Additionally, at the current growth projection, although Fiverr is outgrowing Upwork percentage-wise, Upwork will add approximately $50 million in incremental revenue in 2019, while Fiverr will add "only" $30 million, meaning that the gap between Upwork and Fiverr's scale will likely continue to widen.

Upwork And Fiverr Have Different Approaches

But will these factors suffice for Upwork to stay ahead of Fiverr?

A quick glance over Fiverr's and Upwork's homepages suggests that both companies are basically doing the same thing. But that's not really the case. This blog post has some good insights into the differences between the two platforms.

From an investor's perspective, the main difference between the companies lies in their different approaches/visions: While Fiverr states that its goal is to mirror a typical e-commerce transaction (i.e., make it simple and cheap), Upwork appears to be trying to appeal more to larger clients, counting on repeat business and upsell opportunities from these clients. As you can read in the blog post linked above, Upwork is also much more involved in moderating its platform, making sure the right people are providing their services.

As Upwork's management noted in the most recent earnings conference call, the platform is demand-constrained and very oversupplied in terms of the number of freelancers. Every day, over 10,000 people apply to join Upwork as freelancers, but Upwork only has jobs for about 2% of them.

Accordingly, the key to business success in Upwork's view is to focus on onboarding as many clients as possible and making them stick to its platform, i.e., growing its core clients.

Upwork's increased focus on client upselling (and retention) shows itself in the company's new structure of marketplace offerings: Upwork Basic, Upwork Plus, Upwork Business, and Upwork Enterprise.


The company already had the "free" Basic offering (called "Standard" previously) - it's not free though, you always pay the standard transaction fees - and an Enterprise offering targeted at the largest clients. Plus and Business are new services aimed to better serve small and mid-sized businesses. There is no way yet to tell how these subscription services will pick up - it's simply too early to evaluate - but it seems like a smart move to try to lock in clients to the platform with additional services.

Fiverr, on the other hand, simply defines its buyers (i.e., clients) as buyers who have ordered a Gig on Fiverr within the last 12-month period, irrespective of cancellations. Reading through its F-1 Statement gives no indication of Fiverr focusing on similar metrics to core clients or client spend retention. It also doesn't offer additional services, to my knowledge.

What's Wrong About Fiverr's Vision

What is the right approach to connecting freelancers with businesses? It's hard to tell at this point.

Upwork seems to have a clear scale and time advantage at the moment. Also, focussing on quality and long-term client relationships could set the company up for long-term sustainable growth.

Fiverr seems to score by making its platform easy, cheap, and widely approachable, which could help the company grow fast and possibly disrupt its larger competitors. But it could also cause the company problems down the road if the lack of quality freelancers and businesses tarnishes its reputation.

Fiverr's vision of the freelancer market is a bit bewildering to me. Basically, it appears that company management thinks buying a service from a freelancer shouldn't be much different from buying a pair of socks online. It doesn't matter who buys from whom, the transaction should simply be made easy. That's certainly an interesting approach, but I'm not sure I'm buying it.

Freelance services are not a commodity. They are mostly linked to creative work and as such don't really lend themselves to an SKU-like services catalog, as envisioned by Fiverr. Besides, knowing from personal experience, freelancers want to have durable relationships with their contractors - it makes their working lives so much easier. Upwork is clearly addressing this, but is Fiverr?

Upwork Still Not A Convincing Buy

The bottom line is, I like Upwork's business much more than Fiverr's, and after looking into both companies, I feel much better about Upwork's competitive position going forward. But does that make Upwork a good investment? Not necessarily.

At my last time of writing, shares were trading at an EV/S ratio of 6.55 based on 2018 numbers. Based on projected 2019 revenue of $304 million the company is trading at a forward EV/S ratio of approximately 5.21, so it is slightly more attractive from a valuation perspective.

However, as I already wrote, Upwork's most recent quarterly earnings report was very underwhelming - especially its decelerating top line growth raises concerns. If the company has such an attractive market opportunity and is the market leader, why is it not growing faster but instead is decelerating?

In the meantime, Upwork is not making any visible move towards reaching profitability. In short, the company is seeing declining growth, while seeing no margin expansion. That is not a combination you want to see in a growth stock, and is why I still chose to stay on the sidelines with Upwork.

In the meantime, these are the key takeaways and things to look at going forward, in my view:

  • Look for revenue growth to reaccelerate during the year: Management laid out that the business would accelerate progressively throughout the year to reach the goal of 20% yoy growth.
  • However, what you really want to see is the business starting to gain real traction, approaching 30% yoy growth or higher. Until that happens, the story of a huge TAM that is ripe for the taking may be more a dream than reality.
  • Keep track of the relation between GSV growth and core client growth. Ideally, you want to see GSV outgrowing the additions of core clients. In Q4 2018, that was the case: GSV growth of 28% vs. 22% core client growth. But that reversed in Q1 2019 with GSV growth of 21% vs. 22% core client growth.
  • Watch out for the progress in the new subscription services, Upwork Plus and Business. If they are successful, they could drive growth acceleration in the future.
  • Also, keep an eye on Fiverr's progress.

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This article was written by

Niki Schranz profile picture
I am an individual investor. My investment decisions are based on fundamental analysis and long-term thinking. I study earnings releases, conference calls, announcements, and basically everything I can find about the stocks I own. When I find the time, I like to write down some of my thoughts. My imaginary investing mentors are Warren Buffett, Peter Lynch, Philip A. Fisher, Howard Marks, Saul Rosenthal, and David Gardner. I am also a big fan of business strategy, so I study the works of people like Clayton M. Christensen, Hamilton Helmer, and Ben Thompson. My goal is to find the best quality companies that yield the greatest returns in the long term. My portfolio (as of March, 2021): AAPL, AMZN, CRWD, DDOG, GOOG, MA, MDB, NET, NFLX, OKTA, PYPL, SHOP, SNOW, SQ, TWLO, UPST, ZM, ZS. My content is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making any investment decisions.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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