Key insights
- The author argues Freshworks (FRSH) is undervalued despite failing traditional value screens. Key bullish points are strong margins, free cash flow, a clean balance sheet, and the CEO's experience scaling ServiceNow. The author believes the market is underestimating Freshworks' potential to reach $1.5B in revenue, driven by its experienced CEO. However, the crowded market and SMB customer churn pose risks.
Most fundamental screens will ignore this one immediately. Only passes 2 of Graham's 7 criteria, no dividend, has had loss years, revenue is still under the $1.5B threshold he requires, etc.
But a few things are worth actually looking at.
The margins are really good. 85% gross, 21.9% net, $221M free cash flow. For a company with 4,500 employees that runs most of its operations offshore, the cash generation is great. The balance sheet is clean too with no meaningful debt.
The P/B of 2.12x gets flagged as a fail but I'd argue that threshold just doesn't apply here. Graham built that rule for factories and railroads. In software, book value is less meaningful since the asset is the customer base and the recurring contracts, not equipment on a balance sheet.
The reason I'm actually watching this is Dennis Woodside. He spent 8 years at Google, the last two and a half as President of the Americas where he helped grow ad revenue in the region from $10B to $17B. Before that he was building out Google's presence across the UK, EMEA emerging markets, Russia, Africa, the Middle East. The guy knows how to scale a sales org across geographies.
What I find more interesting though — he was also on the board of ServiceNow. That's Freshworks' direct competitor in the enterprise service management space. He didn't just stumble into this CEO role, he sat at the table of a company that figured out how to scale this exact business model. He knows exactly what that path looks like.
They're at $839M revenue. Graham's threshold is $1.5B. If Woodside can get them there over the next few years, this scores 5/6 on the checklist and the narrative completely changes.
Not saying it's a slam dunk. The space is crowded and the SMB customer base they go after churns harder than enterprise when things get tight. But at $8.98 I don't think the market has caught up to the fact that this isn't the same money-losing growth story it was two years ago.
Anyone else been following this one?