One growth stock that’s performed very poorly in recent years is freelance employment platform operator Upwork (NASDAQ: UPWK). After shooting up during the pandemic (when the ‘gig economy’ was flying), the stock’s fallen by around 85%.

Now, as an investor in Upwork (I view it as a speculative ‘moonshot’ growth stock), I’m obviously disappointed with this abysmal performance. However, I believe the stock’s capable of staging a rebound.

And I’m clearly not the only one with this view.

Activist investor on board

One hedge fund that sees value in the stock right now is activist investor Engine Capital (a value-oriented special situations fund). It announced last week in an open letter that it’s taken a 3.5% stake in the small-cap company.

It reckons Upwork has a great deal of potential that’s not being realised. And it believes the stock’s currently “deeply undervalued“.

We invested in Upwork because of its promising position as the world’s largest work marketplace, its significant addressable market given the growing acceptance of remote work, its potential to meaningfully disrupt the workforce solutions industry, and our belief that the company is deeply undervalued.

Engine Capital

Looking ahead, it wants to see Upwork:

• Improve the basic functionality of its freelancer marketplace
• Focus on enterprise clients (large-scale organisations)
• Optimise its cost structure
• Buy back undervalued shares
• Strengthen the board
• Align executive compensation to shareholder value creation

The investment firm believes that a “tremendous amount of shareholder value” can be unlocked if Upwork’s board acts with urgency to make the necessary changes.

My view

Now, as both an investor in Upwork and a long-term user of its freelance platform, I have to say I think Engine Capital’s ideas are excellent. I genuinely believe that Upwork has so much potential from an investment perspective but, right now, it feels like management’s asleep at the wheel.

I also agree with Engine Capital in relation to Upwork’s valuation. With the company currently trading on a forward-looking price-to-earnings (P/E) ratio of just 9.5 (about half the US market average), I think this stock’s extremely undervalued. It’s worth noting that revenue continues to grow at a healthy pace (last year it climbed by 11%). Given the level of top-line growth, there’s potential for a much higher valuation here.

Risks vs reward

It’s worth pointing out that even if Upwork’s management was to implement all the strategies proposed by Engine Capital, the company’s still likely to face challenges in the years ahead.

For starters, there’s the threat of artificial intelligence (AI). This could actually eliminate a lot of the jobs on the Upwork platform (writing, coding, graphic design, etc). Then, there’s competition from rivals such as Fiverr and Toptal.

I remain optimistic in relation to the company’s long-term prospects though, as I reckon the gig economy’s only going to get bigger in the years ahead.

Ultimately, I see a lot of investment potential here.