Tuesday, Wolfe Research raised its rating on Freshworks Inc (NASDAQ:FRSH) from Peerperform to Outperform and set a new price target of $27.00. The firm highlighted a shift in the company's prospects, citing improved fundamentals and execution, as well as competitive dynamics that could support a multi-year revenue growth of 20% with expanding margins.
The upgrade comes after Wolfe Research had previously downgraded Freshworks in December 2022 due to a challenging macroeconomic environment, post-IPO execution challenges, and declining revenue growth. However, the analyst now sees a "very different setup," with the last three quarters showing a stabilized macro environment, improved customer retention, and positive sales leadership changes that could lead to accelerated growth and double-digit operating margins.
The firm's Tactical Analysis indicates that Freshworks is trading at a 24% discount to the median of its peer group based on calendar year 2025 revenue projections. Additionally, the stock is at a nearly 38% discount on Wolfe Research's relative valuation chart and holds the highest discount to competitor HubSpot (NYSE:HUBS) since August, at 41%. The analyst believes these discounts are unwarranted given the company's competitive position.
Freshworks' competitive edge is also seen in its increasing win rates against legacy competitors and the inclusion of Freddy AI in many contracts, which is expected to lower adoption friction and open opportunities for monetization upon renewals. The firm's upside model predicts accelerating top-line growth in 2024 and beyond, with a 20%+ growth through 2026, alongside continued margin leverage.
Despite mixed demand trends in the SMB segment, Wolfe Research is optimistic about the mid-market adoption of GenAI functionality and views Freshworks' significant non-US revenue as a strategic advantage compared to peers. The firm anticipates that earnings will be the primary catalyst for the stock's performance, with potential positive momentum during the upcoming conference season as investors recognize the value in Freshworks' stock. The new price target of $27.00 implies a 9x multiple of calendar year 2025 estimated sales.
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