Freddy AI Agent And Copilot Will Improve Operational Efficiency

Key Takeaways

• Freshworks' AI innovations and strategic initiatives improve customer experience and operational efficiency, boosting revenue growth and margins positively.
  
• Expanded enterprise and mid-market presence, coupled with strategic partnerships, drive market share gains and capture substantial future ARR growth.
  
• Freshworks faces growth and profitability challenges due to macroeconomic uncertainty, reliance on large clients, execution risks in partnerships, and potential AI solution inefficacies.

Catalysts

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

• Freshworks' focus on AI capabilities, particularly the adoption of Freddy AI Agent and Copilot, shows strong growth potential. The AI solutions are expected to drive productivity improvements for customers, which could significantly boost revenue as these solutions become indispensable.
  
• The company's strong performance with large enterprises and mid-market expansions, including successful replacement of legacy systems with Freshservice and Device42, suggests substantial future ARR growth and increased revenue as they capture larger market shares.
  
• Strategic partnerships and an enhanced partner program have expanded Freshworks' reseller network and capabilities, potentially increasing operational efficiencies and go-to-market effectiveness, thereby boosting revenue growth and expanding their customer base.
  
• The emphasis on innovations and new product introductions, such as improved CX and AI-driven offerings, positions Freshworks to enhance customer experience and retention rates, likely impacting both revenue growth and profit margins positively.
  
• The ongoing strategic deployment of AI within Freshworks to improve operational efficiencies indicates a potential increase in net margins, as these technologies help reduce costs and optimize internal processes, leading to better profitability.

Freshworks Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Freshworks's revenue will grow by 12.0% 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 -9.8% to the average US Software industry of 13.2% in 3 years.
• If Freshworks's profit margin were to converge on the industry average, you could expect earnings to reach $139.8 million (and earnings per share of $0.51) by about July 2028, up from $-73.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 48.9x on those 2028 earnings, up from -59.3x today. This future PE is greater than the current PE for the US Software industry at 42.7x.
• Analysts expect the number of shares outstanding to decline by 2.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.9%, as per the Simply Wall St company report.

Freshworks Future Earnings Per Share Growth

Risks

• The earnings call highlighted uncertainties in the macroeconomic environment and market volatility, which may impact Freshworks' ability to sustain its growth rate and meet revenue goals. (Revenue)
  
• Freshworks emphasizes its AI-powered solutions but faces risks if these solutions fail to deliver effective outcomes or become quickly outdated compared to competitors, potentially affecting customer retention and sales growth. (Net Margins)
  
• Despite strong customer acquisition, the dependency on large clients could pose a risk if these clients choose to switch to other service providers due to better offerings or pricing, impacting revenue consistency. (Revenue)
  
• Freshworks' guidance indicates a potential decline in non-GAAP income from operations in Q2, suggesting challenges in managing operational costs or shifts in investment timing that could affect short-term profitability. (Earnings)
  
• The company’s reliance on strategic partnerships and expansion into vertical markets brings execution risks if partnerships do not yield expected results or if penetration into new markets underperforms projections. (Revenue/Earnings)

Valuation

• The analysts have a consensus price target of $19.857 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 $12.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $139.8 million, and it would be trading on a PE ratio of 48.9x, assuming you use a discount rate of 7.9%.
• Given the current share price of $14.74, the analyst price target of $19.86 is 25.8% 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.