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Leading the way in dealing with heavyweights in the enterprise software operations arena, Freshworks ’share price (NASDAQ: FRSH) has instead fallen more than 54% as shown in the blue chart below since the IPO was published. in September when the company filed to raise $ 855 million.
Now, available at approximately $ 21 to $ 22, valuations have dropped significantly, but I’m not one of those who would tell you to buy the decrease, and instead, I’m looking for concrete metrics like profitability and growth. First, I will begin by assessing competitive advantage by comparing it to competitor Zendesk (ZEN) whose stock has been less affected since September.
The competition
Along with Zendesk, Freshworks ’Freshdesk is one of the most popular customer support software that can gather different communication channels under a single dashboard or just one computer screen. The solutions from these two companies help their clients manage incoming support requests in a timely manner.
This ability to combine different data sources into one has become essential to the rapid evolution of customer communication channels. In turn, ongoing handling of customer inquiries from their Twitter (TWTR), Meta (NASDAQ: FB), LinkedIn page, and other sources has become demanding for sales staff. However, these tools are essential to maintaining a productive relationship with customers. Here Freshworks software makes it easier for employees to interact with customers.
One example is the use of Freddy AI, the artificial intelligence-powered automation tool designed to provide exceptional customer experiences without compromising the human element. In other words, it uses the power of software technology to enable employees of companies like Bridgestone (OTCPK: BRDCY) and Fiverr (FVRR) to deliver proactive customer interaction right from the start.
Freshworks Freddy
Now, when deciding to opt for software to manage their ticketing, issue tracking, and customer communication functionalities, corporations are faced with the task of evaluating different products and choosing the one that best suits them. their operating environment. Here, Zendesk gives them more enterprise features, but, ultimately, more companies choose the Freshworks solution because of the standard of simplicity.
I confirmed the efficiency of Freshworks through Gartner’s peer review website where it got a rating of 4.5, which is slightly higher than Zendesk’s 4.4. Moreover, more peer reviewers, or 87% are willing to recommend a Chennai -based company compared to 81% for its rival. That said, Zendesk provides more advanced features and welcomes multilingual capabilities, but, on the other hand, reviewers noted that its settings (or configuration) pages can “look scary” .
Now, Freshworks may be stronger in the competition, but, it is not enough to ensure success because profitability is also important.
The metrics of profitability
A key metric for software companies is the total revenue generated after subtracting the amount of revenue from total sales. Today, total revenue as a percentage of total revenue equals gross margins, and these are rotating between the 77% and 80% range over the last six quarters as shown in the table below.
Income statement
Looking at the industry, these margin figures are aligned with peers including Zendesk and ServiceNow (NOW), and show that Freshworks does not spend unnecessarily on software development costs, such as ongoing tweaking its platform to accommodate new customers or frequently provide new product versions. Additionally, Freshworks ’gross margins should grow as its revenue level rises rapidly and it benefits from more scale. In turn, quarterly revenue figures show that the company delivered a surprising growth of 71% on a year-on-year basis for the September quarter compared to 32.5% for Zendesk. As for ServiceNow, it only delivered 29% for the quarter this December. Thus, Freshworks is highly valued by growth -focused investors as evidence of its 7% gains on Monday alone.
On the other hand, the fact that the company’s operating costs climbed to $ 214 million in the third quarter from just $ 76 million in Q2 has not been well digested by the market. This surge exacerbated the operating loss status which is at a worrying $ 140.3 million, but Freshworks Chief Financial Officer Tyler Sloat gave an explanation during the earnings call on Nov. 3. According to him, GAAP operating expenses were largely affected by stock-based compensation (“SBC”) and related costs of $ 138 million due to the IPO. Going forward, the CFO expects SBC to become more normal, at levels of approximately $ 45 million per quarter.
Measures of growth, appreciation, and conclusion
Thus, the fourth quarter results to be announced on Feb. 10 should not be burdened by high staff costs, which means an improvement in operating income status. In this regard, Freshworks ’ability to access top technical talent in Chennai, India, suggests that it can invest in a meaningful but efficient way.
Furthermore, should the company continue its growth momentum, it could beat the fourth -quarter earnings guide of $ 99 million to $ 101 million. To this end, Freshworks saw good expansion activity and the net dollar retention rate (“NDR”) was 117% for Q3, up 8% compared to the previous year. Today, the average NDR for companies that have successfully gone public is less than 107% according to Crunchbase data, with anything over 120% considered good.
Thus, at 117%, Freshworks qualifies as a hyper-growth play, and because the company’s customers include SMBs, executives believe the business model can support the 110% plus net dollar retention rate over the longer term. weather. Additionally, customers contributing more than $ 5,000 in ARR (Average Recurring Revenues) grew at 14,079 or 31% year-over-year, reflecting the net add of over 3,300 customers. This customer category continues to drive the majority of business and represents 84% of total ARR, another key metric for SaaS games.
This rapid adoption for the company’s products is often due to their ease of use, which translates into quick onboarding of clients. Ultimately, this results in lower total cost of ownership for the SMB business category which is generally more difficult to deal with rising costs, compared to large businesses. Interestingly, I also noticed that Freshworks products are now adopted by Fortune 500 companies such as Philips (OTCPK: RYLPF) and Toyota (OTCPK: TOYOF).
As for valuations, as a provider of business software for customer support, IT service management, and sales, Freshworks is undervalued when comparing its following price to the sales metric in the equal. Adjusting using a P/S of 9.8x, or double the current value, and based on the current share price of $ 21.75, I got a target of $ 43-44. This matches the ratings of Wall Street analysts.
Comparison with peers
Following a warning regarding high negative EBIT (operating income) margins, it is important for Freshworks to deliver the profitability measure on the next earnings date, due to the risk-off attitude shown by market participants. towards unprofitable tech stocks since mid -November after it became clearer that the Federal Reserve will raise interest rates from March. Any delivery failure can result in a sudden drop in the price of the part.
Finally, with more than $ 1.3 billion in cash including net proceeds of $ 1.07 billion from the IPO, Freshworks has a solid balance to support its business growth. It is also part of a massive industry with 120 billion total addressable market and operates in 120 countries.