Is Freshworks (FRSH) Offering An Opportunity After Recent Share Price Weakness
- If you are wondering whether Freshworks shares are priced attractively or not, it helps to step back and look at what the current market value actually reflects.
- The stock recently closed at US$11.93, with a 7 day return of a 2.6% decline, a 30 day return of a 7.0% decline, a year to date return of 2.8%, and a 1 year return of a 26.1% decline. Taken together, these figures give mixed signals about how investors are currently viewing its potential and risks.
- Recent news around Freshworks has focused on its position within the broader software sector and how investors are reassessing growth oriented names in that space. That context helps explain why the share price has had short term weakness, while the longer term return over 3 years sits at an 18.1% decline.
- On our valuation checks, Freshworks scores a 5 out of 6. This sets up a closer look at traditional valuation methods next, followed by a more practical way to think about what the current price might mean for you by the end of this article.
Find out why Freshworks's -26.1% return over the last year is lagging behind its peers.
Approach 1: Freshworks Discounted Cash Flow (DCF) Analysis
A Discounted Cash Flow, or DCF, model takes Freshworks’ expected future cash flows and discounts them back to today using a required rate of return. The idea is to estimate what those future cash flows are worth in today’s dollars.
For Freshworks, the model used is a 2 Stage Free Cash Flow to Equity approach, based on cash flow projections. The latest twelve month free cash flow is about US$205.1 million. Analysts contribute estimates for the earlier years and Simply Wall St extrapolates further out, with projected free cash flow of US$483.1 million in 2035, all expressed in US$.
When those projected cash flows are discounted back, the DCF model arrives at an intrinsic value of about US$23.64 per share. Compared with the recent share price of US$11.93, this implies the stock is 49.5% undervalued according to this method.
Result: UNDERVALUED
Our Discounted Cash Flow (DCF) analysis suggests Freshworks is undervalued by 49.5%. Track this in your watchlist or portfolio, or discover 884 more undervalued stocks based on cash flows.
Approach 2: Freshworks Price vs Sales
For a software company like Freshworks, where investors often focus on revenue rather than current profits, the P/S ratio is a useful cross check on valuation. It looks at how much you are paying for each dollar of sales, which can be easier to compare across companies that reinvest heavily and may not yet report consistent earnings.
In general, higher growth expectations and lower perceived risk can justify a higher P/S multiple, while slower expected growth or higher risk usually support a lower one. Freshworks currently trades on a P/S of 4.15x, compared with the Software industry average of 4.91x and a peer group average of 6.83x, so it sits below both of those simple benchmarks.
Simply Wall St’s Fair Ratio for Freshworks is 5.65x. This is a proprietary estimate of what a reasonable P/S might be given factors such as its growth profile, profit margins, industry, market cap and company specific risks. Because it incorporates these elements directly, the Fair Ratio gives a more tailored view than a basic peer or industry comparison, which treats all companies as if they faced the same conditions.
On that basis, Freshworks’ actual P/S of 4.15x is below the Fair Ratio of 5.65x, which indicates that the shares may be undervalued on this measure.
Result: UNDERVALUED
P/S ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1443 companies where insiders are betting big on explosive growth.
Upgrade Your Decision Making: Choose your Freshworks Narrative
Earlier we mentioned that there is an even better way to understand valuation, so let us introduce you to Narratives. These are simply your own story about Freshworks that links what you think will happen to its revenue, earnings and margins into a forecast, then into a fair value that you can compare with the current price using an easy tool on Simply Wall St’s Community page. This tool is updated when new news or earnings arrive. One investor might build a Narrative that lines up with the higher analyst fair value of about US$27.00 per share, while another uses the lower end around US$18.00, and you can quickly see how those different views translate into different fair values and potential decisions for the same stock.
Do you think there's more to the story for Freshworks? Head over to our Community to see what others are saying!
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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