Shares of Upwork Inc. (NASDAQ: UPWK) experienced a sharp decline of 19.9% in after-hours trading on Monday, settling at $7.87. The drop erased approximately $242 million in market capitalization, bringing the implied equity value down to $972 million from $1.21 billion at the regular session close. The stock's decline came despite the company reporting second-quarter revenue that slightly exceeded analyst expectations.
Management lowered its full-year 2026 revenue and profit outlook, citing two primary headwinds: the accelerating automation of low-complexity tasks by artificial intelligence and a reduction in customer referrals following changes to Google search algorithms. These factors have weighed on the company's growth prospects, overshadowing the positive revenue surprise.
Q2 Results: A Mixed Bag
For the second quarter, Upwork reported revenue of $191.7 million, a 2% decline year-over-year but ahead of the consensus estimate of $190.0 million. Adjusted earnings came in at $0.41 per share, surpassing the expected $0.34. Gross services volume (GSV) fell 3.6% to $966.4 million, while active clients decreased 4% to 763,000. However, GSV per active client rose 5% to $5,230, marking an eighth consecutive record, and adjusted EBITDA margin expanded to 33% from 29%.
Despite these operational improvements, free cash flow dropped 45% to $35.9 million, reflecting increased investment and higher marketing expenses. The company's shift toward higher-value AI projects is evident, with AI-related GSV climbing 22% year-over-year to an annualized run rate of $330 million. Business Plus volume surged 174%, and AI strategy and consulting grew 51%.
Guidance Cut: A Deeper Concern
CEO Hayden Brown acknowledged the challenges during the earnings call, noting "an acceleration in the AI automation of very low complexity work and further deterioration on Google SEO, especially notable in the non-brand channel." The company now expects full-year 2026 revenue in the range of $730 million to $750 million, down from the prior $760 million to $790 million, representing a midpoint reduction of 4.5%. Adjusted EBITDA forecast was cut to $225 million to $235 million, a 9.8% midpoint decrease, and non-GAAP EPS is now expected at $1.38 to $1.43, down from $1.50 to $1.55.
The more significant cut to profit guidance, compared to revenue, highlights softer demand and increased marketing spend. Management plans to allocate an additional $5 million to $10 million for marketing in the second half of the year, aiming to counteract the decline in organic traffic and client acquisition.
Market Reaction and Analyst Sentiment
Wall Street analysts had not yet updated their models to reflect the lowered guidance, as of Monday's trading. The average price target among five analysts covering the stock stood at $12.88, representing a 64% premium to the after-hours price. However, this gap is likely to narrow as analysts revise their estimates.
The stock now trades just 43 cents above its 52-week low of $7.44, and is 26.3 percentage points closer to that low than it was at the start of the day. Trading volume in the regular session reached 6.98 million shares, more than double the recent average, indicating heightened investor interest.
Outlook and Risks
Looking ahead, Upwork faces several risks, including further automation of entry-level tasks, continued weakness in search traffic, and the possibility that increased marketing spend may not reignite active client growth. On the positive side, the rising demand for AI consulting services could provide a partial offset, though the timing remains uncertain.
For the third quarter, the company forecasts revenue between $176 million and $184 million, a sequential decline from Q2. Investors will closely watch whether the company can stabilize active client numbers and maintain its 33% adjusted EBITDA margin, which will be key indicators of whether Monday's guidance reduction was sufficient.
