Chit Chat Stocks - Upwork (UPWK) | Not So Deep Dive

Episode Date: September 14, 2021

Upwork is a freelancing platform where firms and individual contractors offer various services. The company offers skills in a wide range of categories including anything from sales to data analytics. Listen closely as Ian, Brett, and Ryan go through the history, financials, and future prospects of Upwork. Enjoy the show! Our Tuesday Not So Deep Dives are sponsored by Potential Multibaggers. Multis are looking for stocks that have the potential to go up 10x in 10 years. Check-out the service here: https://seekingalpha.com/checkout?service_id=mp_1308 Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to 7investing with the code "CCM" and get $10 off: https://7investing.com/subscribe/aff/4/ Interested in more of Ian's work? Follow him on Twitter: https://twitter.com/IanGrayLive  Rather watch us on video? Subscribe to our YouTube channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Contact us: [e-mail] Timestamps Company Background | (3:24) Industry | (6:42) Management & Ownership | (8:15) Valuation | (10:35) Earnings | (12:03) Balance Sheet | (14:26) Our Analysis | (16:21) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Welcome in. This is the Tuesday Not So Deep Dive episode. We have Ian Gray back on the show. It's been two weeks. If you remember now, we're flip-flopping. So every Tuesday, we're either

going to have Ian or Brad on the show, get a better cadence for you guys. But today, we're going to be talking about Upwork. If you listen to the show we just did with Chris from growth to value on Fiverr. This is the other big freelance marketplace out there. So we're going to go through it, compare it to Fiverr, talk about the industry, all that good stuff. That's a perfect segue to? Potential Multibaggers. Yes, that is our presenting sponsor for Not So Deep Dead episodes right now. And it is a service on Seeking Alpha and the aim of Potential Multibaggers, which is run by Chris from Growth to Value. That's his pseudonym. And if you want to listen to him,

yes, go back and listen to that Fiverr episode. But the aim of potential multi-bankers is to find stocks that can go up 10X over the next 10 years or about 26% per year. They've found stocks like Cloudflare, Seat Limited, Okta, Square, Livongo, stuff like that. Really good track record. I forget the exact number and it's changed by now, but they've crushed the market over the last- 55% or something like that. It's probably changed since he sent that, but yes, very, very strong track record. chris invests in all the pigs himself and he alerts you when he buys and does what they give constant updates and all that stuff so he's there together with you in the same boat and that makes

a huge difference between someone that just is leaving you out to dry if that sounds like something that you'd want to sign up for um if it's a service you're looking for if you're more growth oriented if you you know like something that's a higher higher risk higher reward type of deal stuff like that if you want to become a multi you can go to seeking alpha and look for from a growth to value google it or go to at from value on twitter all right let's get to up work i want to ask well before that before that i'll talk seven investing too yeah we should just mention seven investing uh they had some recent wrecks come out i guess it would have been a while ago since at the date that you guys are listening to this but i liked this month a lot yeah great

write-ups as always great research reports use our link to get 10 use our link code ccm to get $10 off in the show notes. Check it out. But message us if you want to get that discount and you're confused or anything. But I have to ask for getting to Upwork now. Have you guys heard of the company? Have you followed the stock at all before we started looking at this before the show, Ian? I've heard of the company, not followed the stock super closely, kind of kept a little bit of an eye on the general market, but not Upwork specifically. Okay. Ryan? Yeah, I've used the platform. And so I'm familiar with how it works. And I'll talk about that in my anecdotal evidence, but I'll get right into what it is. Upwork is the world's largest work marketplace measured by basically payment volume. They call it GSV, which is gross services volume.

And so they are essentially just connecting freelancers or independent talent with business opportunities. And that can be enterprise companies that have very specific things they need to get done, or it could be smaller companies, it could really be anybody. And so the independent talent on the platform that is comprised of like individuals, freelancers, or even in some cases, agencies that are kind of like shelling these out to different employees. And then the work type really ranges. So if you're a client, which is what Upwork calls their customers, and customers, I mean businesses. So if you're a client with Upwork and you're

looking to find someone to fit a particular role, you can sort by category. So you could go sales, marketing, graphic design, customer service, software development, stuff like that. There's tons of categories that you can pick from. You can pick a freelancer, you can reach out to them about a role, or on the flip side, you can post like a job listing. And I've gotten emails for this as I am an independent contractor on Upwork. And those emails can get sent out to different potential employees for that job. And then it's kind of just matching opportunities to independent talent. That's the basics of it. I hope that kind of covers it generally. And then Upwork, beyond that, they also facilitate the contracts. So you can sign contracts with the companies or the role or the opportunity that you're going for, and they can facilitate the payments. So that's where they make their money. When a business or a client pays the freelancer, they take a cut.

Upwork takes a cut of that. And that's the majority of their revenue. I think it's almost 13.5%. Yeah, something like that. That's their take rate. But then they also have a managed services part of their business, which is smaller. I think it's only like, it's less than 10% of revenue. Yeah, it's not very important for the business.

But that's, I think, just for bigger companies. And that's a little more cost intensive. But a little bit about the history. Upwork was formed out of a merger between Elance and Odesk, which both had their own sort of freelance communities prior to coming together. So I'll go through the history of each of those. Elance was founded in 1998 by an MIT grad, Birud Sheth, and a Wall Street veteran, Srini Anumalu. Sorry if I'm butchering that.

And they started it in an apartment in Jersey City, but shortly after they moved to Silicon Valley. And their first product was the Elance Small Business Marketplace. Odesk, on the other hand, was founded in 2003 by two friends that have Greek names. I'm not going to try to pronounce them. If you would like to look up their story, feel free to do it. It's called Odesk, but I just simply can't pronounce the names. And then one of them was in Greece, and one of them was in the US. So they kind of worked remotely together. And they basically started as a staffing firm. And then the merger was announced in late 2013. And the name was changed in 2015. So the combined company, the combination was basically started in 2014. And they went public in 2018. They hired their CEO or their now CEO last year in early 2020, Hayden Brown. But I'll let Ian talk about that a little more later. do you want to hit industry and competition? Yeah, let's hit this quick. It'll be simple.

I'm seeing a lot of numbers on this, but something around the middle would be expecting about $9 billion in expected spending on freelance by 2027. And that would be the freelance marketplaces. So stuff like Upwork. And it's expected to grow at about 15% from now until then. So the industry, researchers, other investors, stuff like that are expecting this industry as a whole to grow at a pretty rapid rate. Upwork claims about a $1.3 trillion TAM, but I'm not really so sure about that. Seems a bit large. I've kind of referenced that $10 billion number. Biggest competitor is Fiverr. Again, listen to that show we just did with Chris from Growth to Value to get an overview of them. Very similar business, but slight differences in how they do things. There are

also a lot of smaller competitors. There's TaskRabbit, Catalan, Guru.com, Hubstaff, Hubstaff Talent. TaskRabbit is private, I believe, and their annual revenue is estimated to be about $84 million. So pretty sizable. We'll get into the earnings here later compared to what Upwork is doing. But a lot of these are very small. It's one of those industries where there's a ton of startups that say, I could start up one of these things. We'll get it going. You can get a lot of tiny ones, but getting the momentum to become bigger seems to be a lot difficult. And maybe that's what we'll discuss later if Upwork or Fiverr, stuff like this, has any competitive advantages. But let's move on to management. Ian, what did you find for Upwork?

Yep. Like Ryan was mentioning, Hayden Brown is the president and CEO. She's been part of this company for about 10 years in various roles, mostly related to product. And she was most recently, the chief marketing and product officer before transitioning to CEO in January of 2020. She does own quite a bit of stock. It's not like a big ownership percentage of the company, but it's a sizable amount. I think it's like about $28 million or something like that. So it's meaningful to her, I would assume. The other ownership is the insiders technically own about 9% of the company, but I do insiders and air quotes because most of them are independent directors. They're not actually members of the management team. The CFO, at least as far as I

could tell, owns very little stock. And so most of the insider ownership is from the independent chairman of the board and then two other independent directors. The independent chairman of the board actually has a little bit of an interesting history. He was like the COO at Ticketmaster. Um, and then also he's currently a member on the board of directors of social capital. So he's kind of been around the tech scene a little bit. Um, but yeah, he's, he's the largest individual shareholder currently. Yeah. They got a weird ownership thing. The founders are long gone kind of, and I don't know, I guess Hayden has done quite a good job going right at start of the pandemic it seems like ryan will get into it they're accelerating revenue uh i don't

know seems like she's done a pretty good job january 2020 yeah yeah right before yeah right before it started and she's she's super articulate she um explains things well and she seems to have a good grasp of the market from the interviews i've watched with her and the um and then the conference calls she just seems like she really understands the market well and i i learned something listening to her, which is always good when you're listening to a CEO, I think, to actually learn something from what they're saying. And it's not just a bunch of gobbledygook. Yeah. I mean, she definitely has to have a pretty good grasp for the industry since she's kind of watched it evolve since 2011. I think that's when she first

started working with Upwork. So do you want to hit valuation? Yeah. Market cap, $5.9 billion, ticker UPWK. Interestingly, Interestingly, Fiverr, it's fun to compare the valuation that Fiverr gets versus Upwork. There's a whole type of things. Fiverr has the higher take rates, stuff like that. But Upwork's price to sales is 12 based on the midpoint of their forward guidance for 2021. So we're kind of, you know, that's not too far away. It's only a few months away now.

Price to gross profit is 16.6 based on a 72% gross margin, which is right around where I would expect them to have for this full fiscal year. That's pretty much all I look at right now. They tout all their adjusted EBITDA and stuff like that. You can use that, I think, but I usually just ignore it and they're kind of break-even-ish on cash burn. But one big thing I look at is share count. It's climbing at a pretty quick rate. I would probably factor in 3% to 4% annual growth to be conservative. In share count. in share count. Yes. They granted 5.7 million RSUs in 2020. That probably was due to the CEO

coming on. I don't know if that will continue, but it's hard to tell. And if it does continue, that's bad for shareholders. That's compared to about 127 million current shares outstanding. That's a lot. I don't know how to think about that. It's just a headwind that people have to consider. It's going to be heavy. All right, Ryan, do you want to talk earnings? Yeah. So their second quarter gross services volume, which is, as I mentioned, the money just being transacted on their platform was up 50% year over year to $876 million for the quarter. And I'll talk about sort of how that translates to take rate and so forth. But their core clients, which is the clients that have spent at least $5,000 in aggregate on their marketplace and have transacted in the last 12 months, grew by 21% year-over-year to $162,000. Those clients had a spend retention rate of 114%. So they are spending more.

Not only are they growing their clients, but they're also growing more within their client base. And then active clients, which is just clients that have had a transaction in the last 12 months, was up 27% to $725,000. I think that's a decent measure to track because if the platform is really sticky, hopefully those businesses will migrate to core clients over time. And then they had $124 million in revenue for the second quarter. That's up 42% year-over-year, which is trending a little bit lower than GSV. And so for full year context, they've generated $441 million in revenue in the last 12 months. Their overall take rate did decline year over year and gross margin, which I would imagine would kind of fall in line with, I guess, well, I guess no, it wouldn't, but it has

increased since the year before. It's at about 73% up from 71% a year ago, and they are unprofitable on a gap basis. They had $17 million in free cash flow over the last 12 months, but if you add back stock-based compensation, which is 10% of revenue for the first half of 2021- Oh, gosh. That's a bad number. Yeah. Their cash flow is negative. I think, and this is more speculation on my part, some of that is attributable, hopefully, a sizable portion of that is attributable to the new CEO.

Yes, hopefully. And they're in sort of a disadvantaged position of there's not a lot of founders. I don't think there's any founders still involved with the company. And so any leadership that you get in, you either have to pay them really well in cash or you have to find a way to incentivize them with stock, which is going to lead to dilution. Yeah, for sure. Ian, you want to wrap up with balance sheet? Yeah, pretty simple balance sheet here.

They've got cash of $172 million. That's cash and short-term investments. And they've only got about $30 million in debt and leases. Most of that is leases. They've got about $6 million in debt, $7 million in debt. It's all short-term, pretty much low interest rate debt. I think it's prime plus 0.25%. So no concern there at all. Very strong balance sheet. They do have a sizable amount of goodwill on the balance sheet. I would say it's about $120 million, but that's been steady for the entire history of them as a public company. And so it's never that number's never changed there that it's basically that i wouldn't expect that number

to get written down anytime and this business doesn't really care about write downs anyway so um not a concern strong balance sheet and um should have plenty of cash to to to grow yeah do you want to talk about that that escrow thing that people might look at you know that funds payable how that just matches up one to one on assets liabilities or or do you remember i maybe you maybe didn't see that, but there's like a big number of just the cash they're holding for that they're going to pay out. You're going to see that that's not actually cash they have. It just matches up one-to-one assets to liability. I'd honestly just X that out, pretend it's not even there. Oh, it's just like holding it between the

business and the freelancer. Just the time before that, that they actually pay a freelancer. I'll add some color on the take rate because I forgot to mention it, but the overall take rate in Q2 2020 was 15%. In Q2 2021, it was 14.2%. However, it's kind of important to segregate or move out the managed services take rate. So the marketplace take rate also declined from 13.7% to 13.2%. So not necessarily a great sign there. No. Yeah. You can't have that fall forever all right let's um let's hit that break don't you wish you could just hit skip on the worst parts of your life you know the same way you can skip an ad i get it i'm siaya and i live in ice cove i've made some questionable decisions that didn't end up the way i planned and today i'm

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Advanced security must be enabled in the Panoramic Wi-Fi app. Restrictions apply. Okay, welcome back. Let's hit anecdotal evidence. Ian, do you have anything for us? Not really. I'll pass this one to you guys.

All right, Ryan. Yeah, I use them. For those of you that don't know, Brett and I both write some articles for The Motley Fool, and they use Upwork to facilitate those transactions. I guess my whole relationship.

Yeah, I think they have a relationship, but they're using that payroll service. That's one of their biggest non of the core products is companies the size of like the Motley Fool, who may have, I don't know, there's got to be dozens of us under that program. They basically use it as a payroll facilitator, which can be very nice to manage someone that's going to be a long-term contractor for you. Yeah. And that gets, this is actually sort of relevant to my thinking with the company is that this was a job offer that was sourced outside of the platform, but it's facilitated through the platform. That's the payroll thing. It's kind of a unique one. And I don't, that doesn't mean it pertains to everyone. That's not maybe all the use cases, but I imagine that happens with a lot of enterprise customers where you can find the job listings elsewhere. And then this is just used to sort of intermediate that.

Yeah. I'm not sure how it's, I think they just don't give it out. What percentage of that is, you know, their, their clients, but you can tell how embedded it gets into the organization. If someone like, again, I'm going to use the Molly fool, but just think of that out of those X large company. If they wanted to switch, it would be very annoying for all parties involved. There's no reason for them to switch unless there's just a way better compelling offer. So I guess that gets into something like the competitive advantage remote we will talk about later.

But first, let's hit up future growth opportunities. Ian, what do you have for us? One of the main things that the management team has highlighted is growing their marketing spend and improving their messaging to really open up the market and show how many long-term complex projects can be handled through Upwork and through freelancers, rather than just what you typically think of as gig work and stuff that's more akin to the type of stuff that people talk about on Fiverr. It's already 85% of the business, these long-term complex projects, but they want to transition even further towards that. And they think there's a lot of growth opportunities there.

And even that's how they start getting to some of those huge TAM numbers that that you mentioned earlier brett but i think that's that's going to be a big key for them yeah they did talk about the transition to um hopefully at their scale now they want to do more tv campaigns more broad campaigns across the u.s because a lot of the time with these things people are unaware of what kind of work you can get on there a lot of businesses might just throw it aside and be like yeah you know that's just for someone who wants a logo when you can actually do really you know important work there but uh ryan what do you have yeah the well this one uh before i get to mine they when i look at the balance sheet they are losing money uh i guess not on

a cash flow basis but if you add back stock based compensation they're losing money and cash flow per share it's going nowhere they don't have like a huge cash balance so my thought would be if they're going to up that marketing spend like they might as well no they actually sorry they just raised a convertible note. So it's going to be higher. Okay. I was going to say raise capital somehow. I'll pull that up to get a reference, but yeah, sorry, keep going. Anyway, other than that, the big future growth opportunity for me is Project Catalog. So this is the big project they've been working on that competes almost directly with Fiverr. And so their way of explaining it in the annual report was it offers a browse and buy experience where freelancers post

complete work offerings that clients can purchase on the spot. Now, initially, I thought this would have been kind of catered more towards smaller businesses or smaller clients, and maybe it still is, but management on the most recent conference call said the use cases are really sort of ranging and it's kind of having positive effects throughout the rest of the business. They're finding some existing customers have moved on to the project catalog and used it, whereas project catalog has also accounted for 10% of new clients that are moving into other areas as well. So it just seems like an important thing to add. And if they're going to compete with Fiverr and kind of try to boost that whole discovery feature of their platform, this is a big step in the right

direction. Yeah. It could be a big step on how they accelerate that revenue too. Although it also might not have been, it could just been correlation. It did. Well, yeah, it did not. And they said it's not going to have a meaningful contribution for a while, but it's the right step operationally, even though it won't have any big financial impact. Yeah. All right. Well, just for that, the raise, they closed $575 million of 0.25% convertible notes due 2026. So they raised some convertibles. If you don't know what those are, that just means they're raising debt that can convert into stock at a certain price. I would look at all the details to get all the strike prices and stuff like that. But they raised $575 million that will be on their balance sheet. Ian, you have something?

Yeah, just a little more depth on that. The number that should be added to the balance sheet will be about $510 million after they do a couple of other transactions related to that raise. And then the conversion price on it is at about 40% premium to the current share price. And so a decent premium. It's not like sometimes you see these convertible notes and it's like hardly any premium at all. And so they're basically just giving them stock today. And that's not quite what this is. They have to, they're paying a little bit of a premium. But anyways, back to you, Brett. Yeah, I'll have my future growth opportunity. And if you see on the press release, they talk about it being the Budweiser limited can for Labor Day, which I thought was funny, but that's not really what their product is. They're trying to do that to highlight this new thing called Upwork CoLab. It's another thing to serve their freelancers. um they they call it like exciting brands which i don't know feels a bit as weird i i don't know it feels a bit cringy to me but the uh it is important to get like as serve your freelancers on the marketplace is important to make them or get them work find them an opportunity they feel

fulfilled about you know and this could be a great factor to doing that maybe trying to differentiate themselves versus their competitors i i don't know it seems fine it's kind of like it's a bit like airbnb where they're trying to serve the host first you know what i mean if you guys understand that i don't quite understand what this was so they're partnering they're connecting the freelancers with big brands that they want to work with so the first one was working on budweiser's labor day label which they highlighted which i thought was funny they're like upwork and budweiser oh so budweiser's kind of just or let's say that was the first project that the freelancers got to do okay and they're going to do more like that so like if say you're part

of your portfolio could be like hey look i worked on the budweiser labor day can that's a lot cooler you know in some people's eyes potentially okay uh highlights and lowlights in there for me the highlight i think is the market um you know that you threw out that 1.3 trillion dollar number and they get to that by saying you know here's all of the freelancers we think there are in the world and this is the and then they multiply that number by how much um gross services volume each of the freelancers on their platform does and so they get to this huge you know 1.3 trillion dollar number i don't know like i don't think that's true but i think the market is moving in this direction. So it's pretty interesting to me from that standpoint.

I also think that the strategy... Go ahead. Go ahead. I was just going to say, I also think the strategy is interesting, focused on these business accounts rather than more of the gig type work. And then that just seems to be more friendly for the freelancers in a lot of ways. A couple of lowlights for me, the gross margin is lower than Fiverr. And I think that's due to a couple of these other products that Upwork has. And this is a small low light, but it's not a founder CEO. She's been with the company for a long time though. And so that's kind of a, I don't even want to call it a low light. It's kind of a mid light. It's something to be aware of that. It's not a founder CEO, but she, in some ways,

she seems to act a little bit like a founder CEO. So something to keep an eye on. just an anecdote um yeah yeah i know it's hard to say whether that's like necessarily a low light because she's been there for so long but uh i'll hit mine the highlights for me i think we're all going to have the same ones i think there's clearly industry tailwinds here i think sort of freelancers and remote work and distributed work of this type is going to be larger in the future i don't think that's a very bold take on my part um i also like the fact they're targeting enterprise customers um and part of that is because of my low lights which is the declining take rate and i think part of that is well they said their take rate goes down when your spend

goes above if you hit 10 000 an annual spend and you're a current customer so that graduation almost means kind of a good thing because that means your your customers are sticking around for longer, but it's not great. Yeah. But I also think there's an element to the, we talked about this with Chris, where you can charge a higher take rate if you are a big part of the discovery process. If you're driving a whole lot of value for that, I'm not sure that's where their value is. I like them as a facilitator between businesses and an independent talent, but Fiverr is winning in discovery, I think. Well, there's a reason that Fiverr has a higher take rate double the take rate and growing faster there's got to be a reason for

that that's not for that's not just a coincidence well it's not going faster yeah i'm agreeing with well i thought they were going to 80 60 percent no they are going faster on a percentage basis not nominally not nominally sure sure um but i i think just being a facilitator though that can be a fine business and it might be hard to switch off of upwork is not as defensible as a platform where they're really enabling discovery yeah and do you mean that from the freelancer side where they're not locked in as hard that makes sense there's not as much reason for the freelancers to be there as somewhere where they can where they're constantly finding good jobs maybe maybe i'm wrong yeah i think that makes sense um i'll have mine i think like that network effect or like

the internet marketplace type stuff is strong here and makes sense i mean someone like even TaskRabbit size, and especially the ones that are smaller, had no chance of competing with Upwork. There's no reason I'm going to someone else instead of Upwork or Fiverr. And that advantage only grows as the business continues to grow. Good margins. I feel like this will be a market with only a few companies. I don't know why I feel like that, but I think from the customer's perspective, you don't want to manage these freelancers across 10 different places. If I'm someone I'm like, all right, I want to do, I got Fiverr and Upwork. That's it. They provide my work. And honestly, that, that, I mean, that gives Upwork a huge advantage over

the long run. Lowlights, I have two. Horrendous.com. I mean, come on. And why is Fiverr growing faster percentage-wise? That's something that kind of pops into my mind right away. your other ones you guys had, I agree with too. Let's move into bull case. Ian, what do you think has to go right for the stock to do well? So I think for the bull case, long-term bull case for Upwork, what happens is that it's able to fill the gap left by the current labor shortage. And as people kind of ponder whether to continue working or retire early or do more freelance work, I think that they have an opportunity to help companies realize the value that Upwork is

providing and that the freelance kind of, I don't even know if this is a term, but the freelance revolution actually becomes a bigger paradigm shift than COVID was. I like that term. It's a revolution. We should talk to the marketing team over there. They can talk about it. We'll put it on the app. Yeah, exactly.

But anyways, I think that that's an opportunity for them that is that not just COVID, but also this current labor shortage that people can realize wow freelance work really fills that gap well and it works well for both the companies and for the for the workers in this situation so i think that's the whole case for me yeah i think i think mine's the same if they have sort of a sticky position in this revolution uh if we will um i mean i just think about molly fool is not leaving them right they're not gonna you know well i don't want to say anything the molly fool could leave them but just use that as an example it would be a hassle yeah if they wanted to on both sides yes which gets to sort of my bull case which is the the the network effects are strong

here freelancers want to be where the most job listings are uh and then and right now this is the world's largest work marketplace measured by gsv so uh and then on the flip side clients want to be where the most talent is so that's sort of an advantage just right there um and then if you get sort of that big industry tailwind that we've talked about i think a decade of 20 growth is reasonable or possible um and that could lead that should lead to a good investment i mean yeah that that valuation what is the forward sales ratio 10 for gross profit 17 that's not crazy if you believe 20 growth for a decade i mean that you're sitting pretty there well i always think in the my head stop comp but um i don't know uh yeah i have the same thing as you guys ride the industry

growth wave solidify that competitive advantage the more they grow um that's really it uh bear case though what are your thoughts here my bear case is that freelance work becomes easy through other means and the platform isn't as useful as it once was that it basically becomes the search and discovery is easy through other means the payment transactions um happen in other ways and i know you're going to roll your eyes at me but even crypto or other you know blockchain type technologies yeah there's there's some opportunity for um as that as those transactions become less and less or there's less and less less friction involved in those transactions that some of the problem that Upwork is currently solving is less of a problem in the future.

So it could become more decentralized. You don't need the central entity. Is that kind of the big left tail? Yeah, that maybe I'm usually doubtful on that. But in this case, it might make sense. Although I just think it's going to aggregate demand on both sides. Yeah, I think that's the big question is the search and discovery piece of it, because I think some of the payment facilitation is more of a commodity than a true kind of value-add service. And so it'll be interesting to see if there's other – the search and discovery piece of it may be what keeps Upwork useful for people, but that's just – it's something to watch. Okay. Ryan?

Well, for me, while I do think it would be a hassle to switch for bigger companies, companies, the more competition that comes, the Fiverr, I think Fiverr started recently launching an enterprise solution. If there's a lot more competition that comes in sort of this segment, it's going to create this take rate battle of, all right, well, they can do it for cheaper or, you know, lower my cost, so on and so forth. That I don't really, that would be the bear case for me is that it's crowded. yeah do you think

i'm not sure there's that much value to this platform aside from facilitating the payments between the two i don't think the discovery and i'm probably blinded by my personal experience which was you source the job somewhere else we're a rare we were a rare case though that's not a big part of business maybe they don't give that information though yeah but that's the payroll services if you understand what i mean well but there is also uh but that you can still source a job and then get the rep that they that doesn't mean all the jobs are found on that platform sure yeah which for me if there's big value in a platform like this it's in discovering new gigs yeah i mean what other platforms could come and take that the facilitation part like no no the

the discovery would it be fiverr i know but that's the same but fiverr is an equivalent competitor who could take fiverr and upwards lunch linkedin big tech what are we thinking you have any ideas here twitter i was just going to say even some of the social platforms i think as people create these audiences across social platforms um or create connections across social platforms or can show their work in a in a centralized way whether it's on linkedin through more of a resume or whether it's more of a portfolio on some of these other sites um i think there's some ability that if people can just go find them and then you can connect there's an easy way to connect and facilitate some sort of transaction um that there may not need to be

dedicated discovery tools for um freelance work that it may just be like part of these like it may be google and twitter and linkedin and things like that youtube i think so i'm not super bullish on like Upwork or Fiverr or this kind of marketplace. It's a bit on, feels a bit uncertain to me, but do you guys think that if that was going to happen, it would have already happened kind of deal? Like those platforms have been there forever. They're not pushing. No one is except possibly LinkedIn. I don't know much about LinkedIn, but no one is pushing for that. So it would have to just be kind of. But even if those private platforms, the one we talked about that compete directly with them if those are growing that's just more potential uh sort of take rate

compression yeah but that's where it comes into the competitive advantage of no one can compete with the supply if those other ones have weak supply freelancers you know that's it i think that's a pretty defensible position okay yeah that's the big question i think is it has to be what how defensible is that search and discovery and that pool of supply and things like that rather than... It seems like what's prevented people from finding people on Twitter or LinkedIn or YouTube or Google or all this other type of stuff is that there hasn't been someone to facilitate the transaction. And this is just my opinion, but I think that that's going to become a less and less valuable piece of the business over time. And so they've really got to grow the value

and solidify the value on their supply of people and the search and discovery ability. The supply of freelancers, right? Yeah. The supply of freelancers. Yeah. All right, I'll hit my bear case. The only other thing I had would be right now could be possible. This is an optimal time for these companies. You got, you know, a bunch of new business starting around the globe with kind of this whole COVID reset that a lot of people had. um you know when people got the stimulus dollars it seems like there's a lot of people that were starting their own businesses that leads to demand for freelancers for small businesses that want to outsource some of that work there could be a slowdown in industry growth again i'm not sure it feels uncertain to me i don't know i feel like i just don't know okay something that i

think about that is a potential low light and this might be why i'll go ahead and say it now I'm a little less interested is a lot of these operating expenses, like the marketing expenses. Oh, the marketing expenses were going really fast compared to revenue. Those might continue to grow. It's almost like the web, the no code website builders,

a lot of them, they have to constantly compete for customers because it's just such a competitive market. Yeah. You got, I mean, marketing expense growing faster than revenue. You have to expect that to be switched.

I mean, that's just not a good sign more or less interested in i'm gonna say neither i'm like exactly as interested as i was before i started it was just kind of like there were some things i liked there were some things that i didn't like and um it just kind of was i don't know it didn't make me feel anything really yeah this didn't get your heart pumping ian no not quite not quite and ryan you said less i'm gonna go less unless you had anything else well i would just say it does feel like a quality business i don't like the price yeah don't do relative comp to fiverr yeah don't relative comps dumb um for anyone that does that i'm sorry it's not smart don't stop doing it

relative valuation relative valuation yeah don't do it it's just about what you're gonna earn uh i don't think the valuation is crazy but it's not a good price for what i would i'd probably put fiverr in the lead but again i'm a little bit uncertain about who's the winner here i just don't know. That's why I'm less interested. I don't have a clear insight into what this industry is going to be like. If some other people do, then that's great. If you're really bullish on this stuff, honestly, basket approach could be good here. Obviously, it's not investment advice. Basket approach could be smart here. I was thinking about that. Yeah, that's probably a good idea.

All right. Stock for next week. Ryan, what do you got for us? Actually, two weeks from now. We're growth hacking. We're going SoFi technology. so thank you to every comment that says so if i next please and thank you everyone wants us to do that one so hopefully it uh gets a decent crowd i'm gonna tell you going in knowing that they have a stadium rights on the most expensive stadium in the world uh or probably top five or something like that makes me very very well we're from seattle where the stadium keeps getting renamed over and over over bankrupt and fraudulent companies yeah that i don't know t-mobile t-mobile That's legit, but well, it's been the same exact company.

They just keep rebranding, which is even a bigger low life. Oh, well, I mean, stadium rights in general have basically the track, the track, the base race. It's like the Madden. Yes. The base rate of stadium rights forward returns is pretty low. But so far, hopefully they can anomaly. Hopefully, hopefully they can convince us otherwise.

But either way, it should be a fun one. All right. That's going to do it for this episode. Thank you all for listening. Remember, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan and I are general partners at Arch Capital. Arch Capital clients may hold securities discussed in this podcast.

Thank you all for listening. We'll see you next time.