Does Recent IPO Freshworks (FRSH) Deserve a Place in Your Portfolio?

Founded in 2011, Freshworks Inc. (FRSH) is a California-based technology company that offers software products for businesses to provide customers, as well as employees with a better working experience. The company’s first product, Freshdesk, serves to enhance a customer experience. As for no…

the company has ten different products aimed to serve various components of a business such as IT, human resources, sales and customer service.

On September 22nd, 2021, the company went public on the Nasdaq through a traditional IPO by listing 28.5 million of its Class A common stock. Management initially set to sell shares in a range between $32 and $34 a share, however demand pushed the price to $36.00. As a result, FRSH raised about $1.03 billion from the IPO, which is expected to fund its general corporate initiatives.

The stock ended its first trading session at $47.89 per share, up 33% for the day. However, Freshworks’ share price has since slid 18% to $41.29.

In today’s article, I am going to analyze FRSH to see if the stock deserves a place in investors’ portfolios.

Industry Outlook

Verified Market Research reports that the Application Development Software industry is projected to lift at a CAGR of 25.54%, reaching $1.39 trillion by 2027. This growth is expected to be supported by broader usage of the Internet of Things (IoT) technology, along with a rising need for cloud-based solutions. FRSH should benefit from the industry’s evolving trends. The software development industry is a highly competitive space with well-established companies like Microsoft, Salesforce, Adobe. However, I believe Freshworks’ competitive advantages, such as a free version of its software, could help it grab sizable market share.

Over the past month, the software industry experienced a modest decrease as evidenced by the 2.5% loss in the Shares Expanded Tech-Software Sector ETF (IGV), compared to SPDR S&P 500 Trust ETF (SPY) 2.1% decrease over the same period.

Freshworks’ Financial Performance  

Let’s take a look at the company’s S-1/A filing to analyze FRSH’s financial performance and growth prospects. As of six months ended June 30th, 2021, the company’s revenue has been reported at $168.93 million, representing an increase of around 52.9% on a year-over-year basis.

The company derives revenue primarily through its subscription-based model, offering monthly, quarterly, semi-annual, and annual plans of subscription for its products. Notably, the company’s paying customers increased 18.2% to 52,500 in 2Q2021 compared to its year-ago figure of 44,400. Moreover, the number of customers with an Annual Recurring Revenue (“ARR”) of above $5,000 increased from 9,822 in 1H2020 to 13,326 as of 1H2021.

As of six months ended June 30th, 2021, Freshworks also delivered solid…

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