On Thursday, JPMorgan adjusted its outlook on Freshworks Inc (NASDAQ:FRSH), reducing the stock price target to $19 from $24 while maintaining an Overweight rating. The adjustment follows Freshworks' recent quarterly financial results, which did not meet billing growth expectations.
According to the firm, the shortfall was primarily due to a challenging small and medium-sized business (SMB) environment that affected early renewals in the first quarter. This impact was significant in a quarter that is typically more substantial for SMBs and was not fully anticipated in the provided guidance.
The company's SMB segment, which is closely related to the Customer Support (CS) segment, is experiencing slower growth, with expectations of deceleration towards mid-single-digit growth. This was highlighted during the company's analyst day.
In contrast, Freshworks' IT Service Management (ITSM) business, serving mid-market and enterprise clients, was noted to continue performing strongly. This was evident in the growth of large accounts, with customers providing over $50,000 in annual recurring revenue (ARR) increasing by 29% year-over-year, now comprising nearly half of the business.
In addition to the financial updates, Freshworks announced leadership changes, appointing Dennis Woodside (OTC:WOPEY) as the new CEO & President. He succeeds founder Girish Mathrubootham, who will transition to the role of Executive Chairman.
Alongside these changes, Freshworks provided revised guidance for the full year and second quarter, slightly lowering revenue expectations. However, the company increased its profitability outlook, leading to a more favorable free cash flow (FCF) forecast for the fiscal year.
JPMorgan expressed some disappointment with the quarterly results but considered the after-hours market reaction to be excessive. The firm sees value in Freshworks' stock at the after-hours trading price of approximately $14, which equates to around 21 times the estimated enterprise value to unlevered free cash flow (EV/uFCF) for the calendar year 2025.
Freshworks is anticipated to grow its revenue by 17-18% with an 18% FCF margin. JPMorgan maintains a positive long-term view on Freshworks, citing its strong position as a multi-product company in a large market with low penetration, making it an appealing investment for long-term investors.
InvestingPro Insights
As Freshworks Inc (NASDAQ:FRSH) navigates a challenging environment for its SMB segment, it is important to consider the company's financial health and market performance.
With a market cap of $5.33 billion, Freshworks is a significant player in the software industry, and its impressive gross profit margin of 83.33% over the last twelve months as of Q1 2024 indicates a strong ability to control costs relative to revenue. Still, the company's profitability has been a concern, as indicated by a negative P/E ratio of -44.12, reflecting the market's expectations of future earnings growth.
One of the InvestingPro Tips underscores that Freshworks holds more cash than debt on its balance sheet, which is a positive sign of financial stability. Moreover, with 15 analysts revising their earnings upwards for the upcoming period, there is a sense of optimism about the company's future performance. On the other hand, Freshworks does not pay a dividend, which may be a consideration for income-focused investors.
For investors interested in a deeper analysis, InvestingPro offers more tips, including insights on revenue valuation multiples and predictions on profitability. By using the coupon code PRONEWS24, readers can get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, where they will find 6 additional InvestingPro Tips for Freshworks. This information can be crucial for making informed decisions in the context of the company's recent leadership changes and revised financial guidance.
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