Emerging as a standout performer in the previous week, the decision to invest in Upwork (NASDAQ:UPWK) with hopes of further gains appears to carry some risk. Just like a hot streak in baseball eventually cools down (often at an inopportune moment), the same logic applies to market trends. However, a combination of sentiment in the options market and compelling fundamental catalysts makes a case for contrarian traders to consider exploring Upwork stock.
Strong Q2 Earnings Propel Upwork Stock Forward
The driving force behind Upwork stock’s surge can be largely attributed to the company’s Q2 earnings report. Despite reporting a loss for the three months ending June 30, investors found encouragement in the potential pathway toward sustained profitability. According to the Associated Press (AP), Upwork reported a second-quarter loss of $4 million, translating to a deficit of 3 cents per share. After adjustments for one-time gains and costs, earnings per share settled at 10 cents. On the revenue front, the online freelancing platform recorded sales of $168.6 million, surpassing the consensus estimate of $162.7 million. Looking ahead to the ongoing quarter, which concludes on September 30, the management foresees earnings per share ranging from 9 to 11 cents. Furthermore, the leadership team projects revenue to fall between $165 million and $170 million. To be equitable, The Motley Fool (TMF), a Barchart content partner, indicated that the news might not be as impressive as it seems. TMF noted, “Gross services volume (GSV), reflecting the total value of freelancers’ work for clients on Upwork in the quarter, exceeded $1 billion again. However, Upwork’s portion of that GSV resulted in revenue of $168.6 million, reflecting a mere 7% increase year over year.” Yet, Upwork has laid down the groundwork for potential future triumphs. “Upwork succeeded in bolstering its gross profit margin by an impressive 2 percentage points, reaching 76%. Additionally, the company curtailed its operating expenditure as a percentage of revenue by 10 percentage points, significantly moving closer to achieving profitability.” Nonetheless, the path ahead for Upwork is not without challenges. Evidently, UPWK stock is trading at forward earnings multiple of 36.9, a notable contrast to the average median forward multiple of 21.37 for the business and consumer services sector. In essence, a cautious approach is advised when considering UPWK stock exposure. Still, the fact that shares surged by nearly 38% in the week ending on August 4 indicates a strong sentiment among retail investors. Furthermore, the derivatives market holds even more promise.
Unusual Options Activity
UPWK stock recorded an almost 3% increase on the previous Friday, signaling that the rally is not a fleeting event. Additionally, indications from Barchart’s analysis of unusual stock options volume suggest that traders perceive both short and long-term opportunities with the freelance marketplace operator. By the conclusion of the August 4 session, the total options volume for UPWK stock reached 14,814 contracts, compared to an open interest reading of 47,118. This highlights a substantial difference between the volume during the Friday session and the trailing one-month average, with a variance of 353.3%. Drilling deeper into the data, call volume amounted to 11,392 contracts, while put volume stood at 3,422 contracts. This resulted in a put/call volume ratio of 0.30, favoring bullish sentiment. However, the put/call open interest ratio settled at 0.93. Particularly noteworthy within the derivatives market for UPWK stock were the volume-to-open-interest (Vol/OI) ratios for specific options contracts. The $22.50 call option expiring on January 17, 2025, stood out with a Vol/OI ratio of 64.75X. On the put side, the $17.50 contract expiring on August 18, 2023, showcased unusual activity with a Vol/OI ratio of 9.14. Overall, Barchart observed significant contract activity for options with expiration dates within 41 days from the time of writing (closing of August 4). It’s important to note that analysts maintain an overall bullish outlook on UPWK stock. Currently, the consensus view for shares is a moderate buy, comprising six strong buy recommendations, one moderate buy, and three holds. However, the mean price target for UPWK rests at $11.73, representing a downside risk of approximately 21%. Nonetheless, the optimistic scenario points to a high-side target of $17, potentially yielding a gain of nearly 15%.
Promising Fundamentals Drive Interest in Upwork Stock
Amid the trend of jumping onto the latest market fad, Upwork presents an intriguing proposition despite its imperfections. For short-term traders, the newly acquired momentum of Upwork stock coupled with the attraction of predominantly positive options market participants may prove advantageous. On the other hand, patient buy-and-hold investors stand to benefit from evolving workplace dynamics that favor the freelance platform. Firstly, despite being a somewhat unpopular and potentially minority viewpoint, it’s conceivable that companies will continue to recall their employees, reinstating pre-pandemic workplace norms. While remote workers often express dissatisfaction with increased productivity at home, the growing incidents of time theft combined with employers’ inherent skepticism might lead to the conclusion of the remote work experiment. If such a shift transpires, those returning to traditional work settings may not simply resign to their previous routines. Instead, many could explore opportunities within the gig economy. Secondly, several corporations could find merit in freelance (gig worker) arrangements. In a somewhat cynical interpretation, companies engaging freelancers for specific tasks or operations are not bound by obligations beyond compensating for services rendered. Working with independent contractors also comes with fewer complexities. For instance, beyond specific violations outlined in 42 U.S. Code Section 1981 under the Civil Rights Act of 1866, contracting entities have a wider latitude compared to matters governed by employer-employee relationships. All these factors contribute to strengthening Upwork’s position and its newfound momentum. Hence, while UPWK stock might appear overvalued on paper, a reassessment could be warranted.
Featured Image: Megapixl © Mohammedsoliman4
Author Faith Yakubu