September 24, 2023 Written by Pathikrit Bose via Barchart

• FRSH in 2023, the stock is still up by a respectable 38.7% year-to-date – and is outpacing the IWM by a fairly wide margin – thanks in large part to a very recent earnings-related rally.

• That big bull gap on the chart last week was prompted by an unexpectedly large profit at Upwork, as the company reported EPS of $0.10 – compared to a loss of $0.04 per share in the year-ago period, and against expectations for a breakeven quarter. Revenues rose by 7.5% yearly to $168.6 million, which likewise surpassed the consensus estimate of $162.71 million. 
• Upwork reported net cash generation from its operating activities at $4.3 billion in the April-June period, up significantly from the previous year’s outflow of $446 million. 
• The company also lessened its long-term debt to $355.2 million at the end of the June quarter compared to $564.3 million at the beginning of the year. 
• Although a slowdown in signing new enterprise clients remains a sore spot, the company improved its take rate – a key metric for platform companies – to 16.3% from 15% in the year-ago period.
• Notably, Upwork is making moves to bolster the presence and usage of artificial intelligence (AI) in its platform, too. In July, the company launched its AI Services Hub, which brings clients and talented AI professionals together. To that end, the company announced a partnership with OpenAI, which connects the ChatGPT maker’s customers with AI professionals on Upwork’s platform.
• Analysts remain generally optimistic about Upwork stock, even as the shares have run past Wall Street’s mean target price of $12.27. Out of 10 analysts covering the stock, 6 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, and 3 have a “Hold” rating.

Final Takeaway

• All of the aforementioned small-cap stocks appear to be solid performers at the current juncture, taking into account their robust fundamentals, recent share price movement, operational strength, future outlook, and analyst ratings.
• Although Upwork is making visible moves to strengthen its presence further in its own domain, I remain more inclined to buy Freshworks and Rocket Lab now. This is not only because of Upwork’s downside potential from current levels, but both Freshworks and Rocket Lab appear to have more substantial upside and growth potential relative to Upwork. Rocket Lab’s fascinating partnership with NASA and presence in the commercial satellite launch space offer a unique draw for investors, while the sheer market size gap between Freshworks and its competitor Salesforce suggest there’s ample headroom for future growth.
• I believe if an investor is looking to consider adding small-cap stocks to their portfolio, all three of these names are worth a look. However, if deployable capital remains limited, Rocket Lab and Freshworks are the way to go – with the caveat that RKLB’s imminent Q2 report will likely add some immediate event risk and volatility to the share price.
• On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

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