Activist investor Engine Capital has acquired a 3.5% stake in Upwork Inc. (NASDAQ: UPWK) and is advocating for significant changes in the freelance marketplace.
Engine Capital’s push comes in response to Upwork’s underperformance compared to its competitor, Fiverr International Ltd., in 2024.
The hedge fund’s recent letter to Upwork’s board emphasizes the need for strategic reforms, cost reductions, and an expansion into the enterprise sector.
Upwork lacks strategic clarity and focus
Engine Capital’s letter highlights what it views as Upwork’s foundational issues contributing to a 40% decline in its share price year-to-date.
Discussions with former Upwork employees revealed concerns about the company’s lack of strategic clarity and focus, which the activist investor believes has hampered performance.
The frequent turnover in Upwork’s chief financial officer role—three times in four years—further underscores perceived governance issues, according to Arnaud Ajdler, founder of Engine Capital.
Engine Capital is pushing for a board shakeup, arguing that none of the current directors possess substantial experience in staffing or marketplace operations.
The stock, currently trading below $10, has plummeted from a pandemic high of $59.
Despite this, Wall Street analysts are optimistic about a potential recovery.
The consensus rating for Upwork is a “buy,” with expectations for the stock to reach over $14 in the next twelve months, reflecting a potential upside of more than 50%.
Is Upwork an undervalued stock?
Engine Capital contends that Upwork is significantly undervalued, trading at about 6.5 times EBITDA.
The hedge fund argues that the stock is trading at a discount compared to its intrinsic value and other online marketplaces and staffing firms.
Although the activist investor did not call for a change in CEO, it urged management to cut costs and repurchase shares to enhance shareholder value.
Extended tenures of Upwork’s board members are also cited as a factor in the company’s ongoing weaknesses, highlighting a need for new perspectives.
This push for reform comes shortly after Upwork reported $193 million in revenue for the second quarter of 2024—a 14% year-over-year increase that met analyst expectations.
CEO Hayden Brown expressed confidence in the company’s long-term growth, citing ongoing innovations and the potential for AI to transform the work landscape.
The company also reported earnings of 17 cents per share, surpassing forecasts, and aims to achieve 35% adjusted EBITDA margins over the next five years.
The ongoing situation at Upwork illustrates the growing influence of activist investors in shaping corporate strategies, particularly as market pressures and competitive challenges continue to impact stock performance.
As Engine Capital continues to push for changes, all eyes will be on how Upwork responds and whether these proposed adjustments can reinvigorate the company’s market position.
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