Will Freshworks Stock Recover?

After the market’s monstrous run over the past two years, few stocks have bucked the trend and remain undervalued on a fundamental basis, but Freshworks (NASDAQ:FRSH) appears to be the rare exception. The share price is down 24% year-to-date, a massive underperformance relative to the broader market, which is up closer to 30%.

And that’s not the only thing in favor of bulls who are hopeful for a rebound because, on a technical basis, Freshworks is hinting that a breakout may be on the horizon. So will Freshworks stock bounce back and if so how high will it go?

Freshworks Business Model Has Driven Steady Growth

At a high level Freshworks provides a cloud-based software-as-a-service product so if you’re a business trying to automate things like web, chat, mobile messaging, email, and social media it’s a good go-to solution. Everything from digital messaging to sales automation is made possible and even virtual agents to help answer customer queries.

The key nature of this type of business model is that it’s sticky, meaning that customers can’t easily leave because all their end-customer data is managed by Freshworks. As a result, customer lifetime value is pretty good and recurring sales tend to rise over time, which is seen in Freshworks figures. 

To highlight just how attractive the growth rates have been, consider this extraordinary statistic. In not a single quarter since coming public has Freshworks revenue growth year-over-year dipped into the red. The last four quarters alone have hovered right around the 20% mark with the most recent quarter coming in at 21.5%.

So if the top line has done nothing but grow at a rapid pace for 20 straight quarters, why is the share price down so dramatically vs the S&P 500?

Why Is Freshworks Share Price Getting Hit?

The relative underperformance of the stock market this year suggests something is very awry, either Wall Street is mis-pricing the stock or something serious lurks under the surface, which is it?

One factor that’s not helping to inspire shareholders is that as Freshworks grows its top line, the bottom line is not improving. In virtually every quarter, management reports earnings before interest and taxes close to $30 million over the last year. And we haven’t been able to find a single quarter since coming public where net income crept into the black, absent Q3 2020.

A steady flow of losses naturally makes you glance over at the balance sheet to see how cash reserves are being depleted and how long the business can continue before running into a crunch. Fortunately, Freshworks still has a fortress balance sheet with $391 million in cash and $663 million in short-term investments. A billion dollars of deep pockets to rely on goes along way but it can’t be overlooked that in Q3 2021 that figure sat at $1.1 billion in cash and $146 million in short-term investments, so it has been sliding, albeit marginally.

So it seems the only real problem Wall Street has with Freshworks is that profitability remains aloof but there’s lots of other good indicators to point to a brighter future.

Analysts Are Getting Ever More Positive

While the share price has bounced back somewhat in recent months, it’s coincided with a bullish shift among analysts, sixteen of whom upgraded their estimates for earnings in the upcoming quarter.

So will Freshworks stock recover? The consensus price target among analysts is for the share price to rise to $18.38 per share suggesting 11.4% upside for new buyers.

Running a discounted cash flow forecast analysis paints an even more optimistic picture with $20.73 per share pegged as fair value, representing a 24.8% upside opportunity. 

And beyond the fundamental outlook a technical opportunity appears to be presenting via an ascending triangle.

Freshworks Stock Chart On Verge Of Breaking Out?

The recent pop post earnings took place following a massive upside surprise against expectations where earnings beat estimates by 41%, coming in at $0.11 per share versus an expected loss of $0.09. That profitability surprise was on the back of a 2.68% beat on the top line and suggested management finally had their ducks in a row on the expense side of the P&L.

In recent weeks, Freshworks share price has consolidated and formed a bullish ascending triangle, where it won’t take much upside from here to signal a breakout to higher levels.

If the stock does cross above the $17 per share level, it seems a run to $24 and perhaps beyond is very much within range. While that does eclipse fair value, the bullish momentum of the market more broadly now can act as a tailwind.

Is Freshworks Stock a Buy?

Both fundamentally with 24% upside to fair value and technically, Freshworks appears to be a buy and analysts have, across the board, aligned with that view by upgrading their estimates.

Alongside the billion plus dollars on the balance sheet, the steady growth in the top line since coming public and the sky high gross margins of 84% there is lots to like about this Saas stock.

The strong return over the past 3 months hints at further upside to come following the recent consolidation and the best way to manage that risk is wait for the share price to break above resistance at $17 per share.

Now trading at a market capitalization of around $5 billion and $686 million in revenues over the past year, the price-to-sales multiple isn’t low but it’s not sky high at 7.3x either and when the profitability corner is turned it suggests good things to come for Freshworks shareholders.

A final note is that revenues are expected to climb annually by 15.9% over the next five years so the odds are sustained profitability is nearby too, and the market is likely to reward that positive tectonic shift when it’s clearer, so today’s discount is factoring in the risk of it not materializing.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.