As AI has evolved this year a landscape of early winners is already emerging. There are pure picks and shovels plays, like NVIDIA (NVDA)…and over the past month Advanced Micro Devices (AMD). And then there are companies that use AI in their products, some of the large names here include Microsoft (MSFT) and Google (GOOGL).  

And then there are companies that are embracing AI, using it in their products, and actually making it one of the cornerstones of their business. Upwork (UPWK) is one such company. Not only is the company using AI internally, but its teaching the users of its platform AI skills, and working as a third party intermediary, its traditional role, to connect AI experts with those seeking AI expertise. 

When ChatGPT was first introduced earlier this year, companies like Upwork and Fiverr (FVRR), that work as intermediaries to provide freelance services, were thought to be in deep trouble. The thesis being that AI would replace all of the freelancers. Need a website designed, or an SEO campaign designed…why hire a freelancer when AI can do it almost for free? 

But a couple of things have happened since that first encounter with AI. First, users figured out AI wasn’t quite as push button as they may have thought it would be. Thus the rise of “prompt engineers”. Those that could figure out how to ask the exact right question of AI chatbots to get the right answer. And secondly, as interest rates remained high, and small and medium businesses especially struggled more and more, they found they could replace employees…or simply not hire new employees…with cheaper freelancers. Driving a demand tailwind for Upwork.

So, those that sold Upwork in May, at the height of AI fears around the stock when it was trading under $7, are not pleased they were sucked into the fear, with the stock currently trading near 2023 highs in the $14s. But, given their turn TOWARD AI as a driving force behind their business, this shouldn’t be the top for what is quickly becoming what Upwork itself calls “The preeminent destination for AI-related talent and work.” 

This rapid pivot is already paying dividends as the company reported a very strong recent quarter, with revenue up 11% for the quarter YoY. It appears the forced AI pivot caused the company to refocus its efforts on profitability as well, as they “demonstrated very rapid margin improvements,” moving from a loss in the 2022 quarter to a substantial profit in the recent quarter. 

In its earnings report, Upwork specifically notes it is using, and views AI, in three ways (which I wholeheartedly agree is the right approach at this point in AIs evolution). It is: Innovating AI features within its platform, providing AI tools to its freelancers to improve their work, and providing the AI hub…as mentioned above…for those going to Upwork seeking AI talent. 

Upwork is also focusing on cost, and has substantially reduced unit costs in transaction losses, and sales and marketing. The combination of building out the AI focused business, while at the same time reducing costs, has led to gross margins of over 74%, with the stock trading at just 2.2 times sales. 

And while Upwork has recovered significantly from its AI induced swoon earlier this year, it is still nowhere near its pandemic supported highs of $60. It appears to have room to run to the upside. 

Upwork is a B rated stock in our POWR Ratings with an overall score of 82.26. Its highest component rating is in Growth, not surprising given the current earnings beat and raise by the company, where it outranks 95.96% of the stocks we track. 

Upwork is a great example of a company that embraced the new AI world and very quickly pivoted its business to use and support the new AI tools that exploded on the scene. This company should be a blueprint for other companies seeking to thrive in this new landscape, as AI use and adoption accelerates at a head spinning pace. 

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UPWK shares were trading at $14.16 per share on Tuesday afternoon, up $0.05 (+0.35%). Year-to-date, UPWK has gained 35.63%, versus a 22.31% rise in the benchmark S&P 500 index during the same period.

About the Author: Steven Adams

After earning a law degree cum laude with a focus on securities law, Steven worked as a Nasdaq market maker for a large broker dealer, and then as a trader for an arbitrage focused proprietary hedge fund. He subsequently worked as a consultant for a Fortune 500 consulting firm serving both government and commercial clients, including the NYSE, Prudential, FDIC, and NASA. More...

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