Having grown from its position as a young and developing customer engagement software and services company, Freshworks (NASDAQ:FRSH) now stands at the attractive junction of strong financial performance and delivering attractive shareholder returns. In the past 3 months, the stock has accumulated 23.8% in gains.
With the Artificial Intelligence (AI) hype all around and Freshworks adopting the same, a turnaround earnings quarter, and optimism around the company’s outlook, this stock is here on the watchlist for investors.
Turnaround Quarterly Earnings
For Q1, the company saw its revenue growth (+20% year-over-year) exceeding analyst estimates and its first ever quarter with non-GAAP operating profit ($3.9 million) as a public company. The company has expanded its product suite to meet the tech requirements of large customers such as Wiseman in Europe and S&P Global (NYSE:SPGI).
Furthermore, the number of customers contributing more than $5,000 in Annual Recurring Revenue expanded by 18% while the net dollar retention rate stood at 107%. The company’s customer base of 60,000+ businesses of all sizes include big names like Honda (NYSE:HMC), Coca-Cola (NYSE:KO), and Blue Nile.
Also, free cash flow stood at $9.1 million compared to -$1.4 million in the year-ago quarter.
Looking ahead, the company raised FY23 financial outlook midpoint for non-GAAP operating profit to $5 million. For Q2, it sees 15%-17% revenue growth while full-year growth levels are estimated between 16% to 19%.
Human-Augmented AI to Enhance Productivity
The company president, Dennis Woodside, announced that he has scheduled a launch event for unveiling product portfolio changes that focus on AI.
In March 2023, the company announced new GPT-based conversational enhancements to its in-house built AI-powered assistant, Freddy. Conversational AI will be installed through Freddy across Freshworks’ entire customer and employee suite of products. For sales, support, and marketing, an AI assistant is developed which thereby improves overall developer productivity.
Steps Towards Strategic Spending: Workforce Trimmed, Skill Set Added
In recent interviews, the Freshworks president stated that as Freshworks operates with high gross margins (81.7%) it can achieve strong bottom-line results if costs are managed effectively. He highlighted that the company is now spending more strategically and ensuring a stable return on investment.
Notably, the company has roped in an experienced management team to better meet its growth ambitions. Leaders from companies like Salesforce (NYSE:CRM) and Zendesk work with the company in various regions.
Citing performance reviews as the issue, Freshworks undertook a third round of layoffs in early June across its product, engineering, and go-to-market divisions in the US. While the number of employees removed remains unknown, the layoffs are more senior level this time a source close to the matter cited.
In December 2022, the company had reduced its workforce by 2% (or 90 people) while in March 2023 another 114 employees were laid off.
Is Freshworks Stock a Good Buy?
Of the 13 Wall Street Analysts covering the stock, seven rate it a Buy while the remaining assigned a Hold rating, taking the average analyst consensus rating to Moderate Buy. The analysts’ 12-month average price target of $18.25 implies a 9.15% upside potential from current levels.
Last week, Oppenheimer Analyst Brian Schwartz reaffirmed his Buy rating on the stock with a $17 price target implying a 1.7% upside potential. The analyst cites a steady increase in free cash flow and operating margin (2.8% in Q1 vs. -0.5% in the prior-year quarter), maintaining a more than 20% subscription revenue growth trajectory, as the positives boosting the rating.
