Marksman Monday Update

We at Marksman believe concerns about AI hurting Upwork (UPWK) and other freelancing sites may be overblown. While AI could reduce the need for freelancers, it’s more likely that the nature of services offered will evolve. The reality is that there are now more substitutions than ever for full time employees and this will only increase as AI further improves. For example, in web UX and design, platforms like Squarespace have developed AI-enhanced tools that enable easy website development helping make existing talent more efficient. Now, consumers are able to use these sites instead of hiring a freelancer on their own.

With this being said, there are a few reasons we believe freelancing will remain strong in a world of AI. 

First off, we believe that individuals will still prefer hiring other humans who can offer them a more personalized experience. Freelancers today often juggle multiple clients and different types of work, leading to a choice between standardization and personalization. The evolving landscape suggests a shift away from technical tasks toward more personalized services. Upwork’s move from endorsing standardized proposal templates to encouraging freelancers to customize services reflects this trend.

Personalization offers benefits like smoother transactions, better client experiences, and greater alignment with Upwork’s goal of connecting freelancers with clients. We think this is key in the current freelance marketplace.

Next, there seems to be a potential shift in what tasks Upwork freelancers will offer. This is a move away from technical tasks to more emotional services. With AI helping increase efficiency in technical and repetitive tasks, freelancers are able to commit more time to advise and serve the individual. Areas like brand management, consulting, influencer marketing, and tech assistance will make up some of these growing areas.

Humans will always prefer outsourcing work to someone more competent than them. Even if an individual could leverage AI tools themselves, there would still be learning curves and growing pains in addition to the opportunity cost of time. Humans will need to stay in the loop for a long time. Upwork can help facilitate this.

With this,not only do we expect demand to remain strong, but we expect the supply to grow as well. Interest in freelancing is especially strong among Gen Z. About 53% of Gen Z freelancers are aiming to leave traditional jobs for full-time freelance work. This generation is also well-positioned to understand and use AI, with 79% of "Portfolio Careerists" having received some AI training, including 39% of Gen Z freelancers. This growing interest in pursuing freelance careers will contribute to better overall offerings on a site like Upwork. 

There are still major risks to Upwork’s business model. Competitor platforms offer free AI tools, which could reduce the appeal of Upwork's services that involve operating costs and paying freelancers.

Nobody (minus Sam Altman maybe) truly understands the full potential of AI agents and how obsolete they can make human white collar workers. Broader economic risks, such as a potential recession, could also slow growth in the freelance sector since smaller companies tend to freelance talent. With that being said, a price to earnings multiple in the mid teens should allow Upwork to benefit off minimal good news, or perform really well in the case of any great results or developments. 

While AI presents challenges for Upwork by providing alternatives to traditional freelancing, it is unlikely to fully replace the demand for human expertise and personalized services. The shift toward more customized, emotionally intelligent work represents a significant opportunity for freelancers to distinguish themselves in an AI-augmented world. Upwork is well-positioned to benefit from this evolution, especially as younger generations embrace freelancing and become adept at leveraging AI to enhance their offerings.

We remain optimistic.

Disclosure: At the time of this publication some members affiliated with Marksman Research own stock, options or other interest in UPWK.