Freshworks: A Compelling Investment With A Fresh Perspective (Upgrade) (NASDAQ:FRSH)

Investment Thesis

Freshworks Inc. (NASDAQ:FRSH), the customer relationship management (“CRM”) platform, came out of its IPO and soon fell from grace. Indeed, since Freshworks’ IPO, its revenue growth rates have significantly slowed down as its customer adoption curve moderated.

That being said, the crown jewel for this investment is that Freshworks holds no debt, approximately 20% of its market cap is made up of cash, and the business is already free cash flow positive.

Moreover, given the reset on investors’ expectations, I believe that this is a good entry point to consider this opportunity.

Why Freshworks? Why Now?

Freshworks is a customer engagement and support-related software solution. Its freemium offering allows companies to engage with their own customers across various communication channels.

The obvious competitor here is Salesforce, Inc. (CRM), in that both companies run Customer Relationship Management software that helps businesses manage customer interactions, track sales activities, and nurture customer relationships.

It goes without saying that Salesforce is the Goliath in the CRM sector and offers many more services than Freshworks. What’s more, Freshworks serves small and mid-sized businesses, rather than the bluest of blue chips as Salesforce does.

Furthermore, Salesforce is notorious for its tremendous ability to be customizable, while Freshworks is more rigid and aimed at rapid implementation.

Next, consider Freshworks’ customer adoption curve.

What you see above is that Freshworks’ customer adoption curve appears to slowing down.

If you’ve read my work before you’ll have seen me state, that the customer adoption curve is perhaps one of the most insightful elements into the vitality of a business. If the customer adoption curve is slow and steady, that can make for a perfectly acceptable investment, provided the valuation makes sense, but I get ahead of myself.

Essentially, if the customer adoption curve is slowing down significantly over a period of 12 months, that informs us that customers’ appetite for the platform isn’t as strong as it was in the past.

With this context in mind, let’s discuss Freshworks’ financials.

Revenue Growth Rates Have Fizzled Out

This is the blemish in the investment thesis.

In line with what we have discussed so far, Freshworks growth rates have significantly decelerated. As one would expect, this surfaces the crucial question, what sort of growth rates is Freshworks likely to exit Q4 2023 with?

As you can see above, analysts following Freshworks expect to see sub-20% CAGR. Even if we were to make the proclamation that these revenue growth estimates are too conservative, the fact is, that Freshworks is unlikely to grow by much more than 20% CAGR any time soon.

Put another way, given its more moderate growth rates, investors will be increasingly turning their focus to its underlying profitability, which is where we also head to next.

Profitability Profile is Improving

Part of the appeal to consider Freshworks is that the business is already reporting positive free cash flows.

Furthermore, looking out to the year end, Freshworks contends that it will end the year as non-GAAP positive.

Given that Freshworks holds more than $1 billion of cash, no debt, and is already free cash flow positive, it’s difficult to make the case that the stock is overpriced.

In fact, when we consider the fact that 20% of its market cap is made up of cash, it further reinforces the appeal of considering this investment.

What’s more, unlike many peers, Freshworks’ multiple hasn’t meaningfully expended in the past several months.

All in all, I make the case that the stock provides investors with an attractive risk-reward and that paying less than 9x forward sales is a compelling entry point.

The Bottom Line

Freshworks Inc., a CRM platform, faced a decline in revenue growth rates after its IPO. However, the company boasts a debt-free status, significant cash reserves comprising 20% of its market cap, and positive free cash flow.

Considering the muted investor expectations, now might be a favorable time to consider investing in Freshworks.

The customer adoption curve for Freshworks has shown signs of slowing down, highlighting the need for evaluating the company’s growth potential.

Despite the deceleration in revenue growth rates, Freshworks demonstrates improving profitability and positive free cash flows.

With its attractive risk-reward profile and a valuation of less than 9x forward sales, Freshworks presents an enticing investment opportunity.