Freshworks tries to grow despite strong headwinds

Strong market headwinds from the war in Ukraine, rising inflation and the risk of recession pushed Freshworks Inc. (FRSH) shares down over the past 12 months, after falling almost 70%.

Adding another net loss to the likely ongoing turmoil, the company and analysts expect a tough year ahead.

Maybe this title will be more attractive in the future. Until then, he still needs to provide evidence of investment, such as moving to net profit as soon as possible

About Freshworks

Freshworks develops modern customer relationship management (CRM) software for e-commerce. The company offers its technology as a “product as a service” that helps businesses around the world deal with their customers and employees.

Freshworks has a globally distributed team serving over 50,000 customers. The company’s headquarters are in San Mateo, California.

On TipRanks, FRSH scores 8 out of 10 on the Smart Score spectrum. This indicates high potential for the stock to outperform the broader market.

Q1 2022: Revenue growth but loss

Total revenue of $114.6 million for the first quarter of 2022 represented a 42% year-over-year jump driven by an increase in the number of top-spending customers (in terms of annual recurring revenue ( ARR)) and following the addition of new entries in the customer portfolio.

In terms of revenue, the company beat analyst consensus, with estimates on Wall Street averaging $108.24 million.

Total operating expenses also increased significantly in the first quarter of 2022, meaning revenue growth was not enough to avoid a negative net profit.

As such, the transaction generated an adjusted loss of $0.6 million, flat year-over-year, while the net loss on a diluted equity basis was $0.01 for the first quarter of 2022 compared to a net loss of $0.02 in the prior year quarter. .

Additionally, a cash outflow of $1.4 million from operations in the first quarter of 2022, compared to a cash inflow of $4.8 million from operations in the first quarter of 2021.

While the ARR increased by 300 basis points year-over-year.

The balance sheet remains fresh

As of March 31, 2022, Freshworks had nearly $1.2 billion in cash and short-term securities. Around 50% of this amount was exposed to financial market turmoil, which remains elevated due to major macro-economic and geopolitical issues around the world.

This exposure has steadily increased since the third quarter of 2021 and has now more than quadrupled, which does not seem prudent given the current uncertainty surrounding current and likely future markets.

Meanwhile, fast cash is down more than 19% from the last quarter of 2021 and halved from the third quarter of 2021.

Thus, quick and potential cash resources cannot provide financial support for operations for more than just a few years.

However, the balance sheet is acceptable from a financial strength perspective, as evidenced by an Altman Z score of 6.40.

Essentially, the ratio measures the likelihood that the business will not be able to continue operations and will be closed due to bankruptcy.

Freshworks does not face a risk of bankruptcy as any Altman Z-Score above 2.9 indicates safe areas. A ratio below 1.79 would rather indicate hot spots and a high risk of bankruptcy.

But if the value of the ratio is between 1.8 and 3, the company is in a gray area, which still implies a risk of bankruptcy, although low.

Despite the growth environment, Freshworks will suffer a loss

As more and more companies around the world are using CRM software to improve customer loyalty and increase sales, the market for customer relationship management is expected to grow rapidly over the next few years.

Despite Intelligence of Mordor estimating a 15% annual growth rate of CRM software for the coming years, therefore favorable market conditions, Freshworks still sees an adjusted net loss of $0.18 to $0.16 in 2022, compared to the median analyst estimate at -$0.16.

Analysts expect another adjusted net loss of $0.10 per share in 2023.

If the net loss were to reoccur, the impact on the balance sheet could this time be felt by shareholders. Additionally, if the market continues to face severe headwinds, the magnitude of the negative effect on stock prices could increase significantly.

The Taking of Wall Street

Over the past three months, eleven Wall Street analysts have released a 12-month price target for FRSH. The stock has a Moderate Buy consensus rating based on seven buys and four holds.

Freshworks’ average price target is $24.18, implying an upside potential of 58.25%.

Evaluation

After falling almost 70% in the last 12 months, the stock is currently trading at valuations significantly lower than it was during this period, as shown in the statistics below.

The surge separating the stock price from the midpoint (around $31.94) to the 52-week range of $10.51-$53.36 is very steep.

Moreover, this price is only slightly above the price of the 50-day moving average of $14.69 and represents a 40% discount from the price of the 200-day moving average of $24.77.

Various headwinds pushed the stock price down with force. Given that these were caused by issues that will fuel investors’ risk aversion for a long time, it is reasonable to expect lower share prices going forward.

Estimating how much this challenge may still affect the stock price and to what extent is not an easy task. Technically, there seems to be room for more setbacks before we hit rock bottom. The 14-day Relative Strength Indicator (RSI) helps form this idea.

The stock has a 14-day RSI of 58, suggesting that the stock price is far from oversold despite falling over the past 12 months. The indicator is between 30 and 70. A reading of around 30 means the stock is oversold, while a reading of 70 means the stock has approached the overbought level.

Based on published growth estimates from both the company and analysts, who are still forecasting net losses for at least the next two years, these and likely future price levels, while low, will hardly be indicative of future growth. cheap stocks.

Conclusion

The stock has significant growth potential as it develops software that enables other companies to retain customers and increase revenue.

The company appears to be attracting new customers, but it will take more work before the portfolio shows a positive return.

Operational activities consume monetary resources, which are however not available in unlimited quantities and are increasingly subject to market volatility. Moreover, market conditions are expected to remain unfavorable in the coming months.

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