AI Adoption And EX Expansion Will Attract Mid-Market And Enterprise Customers

Key Takeaways

• AI solutions and product improvements are set to drive revenue growth through customer adoption and retention, enhancing expansion into AI-driven services.
  
• Strategic partnerships and expanded service offerings are expected to attract larger clients, boosting revenue and improving net margins.
  
• Freshworks faces challenges from reliance on innovation, currency fluctuations, M&A risks, and competitive pressure, which may hinder growth and revenue targets.

Catalysts

A software development company, provides software-as-a-service products in North America, Europe, the Middle East, Africa, Asia Pacific, and internationally.

• Freshworks anticipates AI to be a significant growth driver, with the adoption of AI solutions like Freddy Copilot and Freddy AI Agent increasing among new and existing customers. This should enhance revenue through increased sales and expansion into AI-driven services.
  
• The expansion of Freshworks' Employee Experience (EX) offerings, including investments in IT asset management (ITAM) and enterprise service management (ESM), is expected to attract more mid-market and enterprise customers. This strategy will likely boost revenue and improve net margins by selling higher-value solutions.
  
• Freshworks' strategic partnerships, such as the agreement with Unisys to develop a managed service provider (MSP) offering, could broaden their customer base and lead to additional revenue streams, enhancing overall earnings.
  
• The successful execution of customer conversions from free-to-paid models, particularly in the small and medium-sized business (SMB) segment for their Customer Experience (CX) products, will contribute to revenue growth.
  
• Freshworks' ongoing product improvements and integrations, like those for Freshdesk and Freshservice, are expected to improve customer retention and drive cross-selling opportunities, supporting stable revenue growth and potentially improving net margins.

Freshworks Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Freshworks's revenue will grow by 12.4% annually over the next 3 years.
• Analysts are not forecasting that Freshworks will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Freshworks's profit margin will increase from -13.2% to the average US Software industry of 12.0% in 3 years.
• If Freshworks's profit margin were to converge on the industry average, you could expect earnings to reach $123.2 million (and earnings per share of $0.4) by about April 2028, up from $-95.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 61.8x on those 2028 earnings, up from -38.6x today. This future PE is greater than the current PE for the US Software industry at 29.6x.
• Analysts expect the number of shares outstanding to grow by 0.91% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.61%, as per the Simply Wall St company report.

Freshworks Future Earnings Per Share Growth

Risks

• The company's reliance on delivering growth through continued innovation and AI product integration carries the risk of execution challenges, which could impact revenue and expansion potential if the innovation does not meet market expectations.
  
• The focus on expanding into the EX market and reliance on large enterprise and mid-market clients to switch from competitors like ServiceNow may face hurdles if these companies are slower to transition than anticipated, potentially affecting revenue and growth targets.
  
• FX (foreign exchange) risks are apparent, with significant impacts on ARR and revenue growth due to currency fluctuations, which could negatively affect net margins and overall financial performance.
  
• Freshworks' strategy relies heavily on M&A, such as the acquisition of Device42, to enhance its product offerings, which brings integration risks that could compromise operating margins and earnings if not managed effectively.
  
• The competitive pressure in the mid-market and enterprise segments, including from established players like ServiceNow, may affect Freshworks' ability to capture market share and achieve its revenue and growth goals, particularly in the face of complex and evolving customer needs.

Valuation

• The analysts have a consensus price target of $19.765 for Freshworks based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $27.0, and the most bearish reporting a price target of just $11.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.0 billion, earnings will come to $123.2 million, and it would be trading on a PE ratio of 61.8x, assuming you use a discount rate of 7.6%.
• Given the current share price of $12.21, the analyst price target of $19.76 is 38.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.