Scotiabank cuts Freshworks stock target, keeps Sector Perform

On Wednesday, Scotiabank made an adjustment to the price target of Freshworks Inc (NASDAQ:FRSH), a customer engagement software company. The new price target is set at $16.00, reduced from the previous target of $18.00. Despite this change, the analyst at Scotiabank decided to maintain a Sector Perform rating on the stock.

The adjustment comes after Freshworks provided a forecast that suggested a stronger second half of the fiscal year 2024. The company's guidance was raised by approximately $10 million at the midpoint. However, this increase includes contributions from the recent acquisition of Device42, which is expected to add around $11 million.

The analyst noted that this might temper the enthusiasm of investors who were hoping for a more robust organic growth in Freshworks' core business.

Furthermore, the acquisition of Device42 is anticipated to unlock opportunities for cross-selling and enhance the company's product synergies, as well as strengthen its channel presence.

The analyst pointed out that the strong performance of Freshworks' IT Service Management (ITSM) business, which reported an Annual Recurring Revenue (ARR) of $340 million and a year-over-year growth of 30%, may boost investor confidence in the acquisition's value.

In the report, management indicated that there has been no significant change in the demand environment or macro conditions. However, they are adopting a cautious stance in their guidance and expect the Net Revenue Retention (NRR) to decrease slightly in the third quarter by about 100 basis points.

Nevertheless, certain metrics such as NRR, gross retention, and organic net adds suggest some level of stabilization. Management also highlighted positive developments with their products Freddy CoPilot and Freddy Self-service.

Despite the lowered price target, the analyst expressed a view that the results are likely satisfactory enough for investors to feel more optimistic about Freshworks' prospects in the second half of the year and to reassess the recent acquisition, especially following a challenging first quarter.

In other recent news, Freshworks Inc has seen several adjustments to its stock price targets and ratings. Canaccord Genuity reduced its price target for the company from $20 to $17, maintaining a Buy rating. This adjustment reflects the firm's perception of Freshworks as a low-risk opportunity in the small to mid-cap software sector, with potential for growth reacceleration beginning in 2025.

Freshworks also announced the acquisition of Device42, a move aimed at enhancing its IT Asset Management capabilities. The acquisition is expected to provide customers with improved asset discovery and application dependency mapping.

Meanwhile, Needham adjusted its outlook on Freshworks, reducing the price target to $20 from $30 while maintaining a Buy rating. This followed a series of investor meetings that left analysts feeling positive about Freshworks' ability to overcome first-quarter obstacles and enhance return on investment throughout the year.

However, Freshworks experienced a downgrade from Outperform to Perform by another leading firm, citing concerns over small and medium-sized business headwinds and a recent abrupt change in leadership.

InvestingPro Insights

In light of Scotiabank's recent analysis of Freshworks Inc (NASDAQ:FRSH), additional insights from InvestingPro may offer investors a more comprehensive view of the company's financial health and market performance. Freshworks currently holds a market capitalization of $3.97 billion and, despite experiencing a notable price decline over the last six months, analysts predict the company will be profitable this year. This is underscored by a robust gross profit margin of 83.33% in the last twelve months as of Q1 2024, reflecting the company's ability to maintain profitability at the gross level.

InvestingPro Tips suggest that Freshworks holds more cash than debt on its balance sheet and has impressive gross profit margins, which could be a sign of financial stability and operational efficiency. Moreover, with 15 analysts revising their earnings upwards for the upcoming period, there appears to be a consensus on the company's potential for growth. These factors may contribute to investor confidence, especially in light of the company's strategic acquisition of Device42 and its impact on future revenue streams.

On the performance front, Freshworks has seen a 19.73% revenue growth in the last twelve months as of Q1 2024, with the price of its stock currently sitting at 51.08% of its 52-week high. The recent price adjustments and the analyst's sector perform rating might present a buying opportunity, especially considering the company's fair value estimated at $17.34 by InvestingPro, which is higher than the current price of $13.28. For investors seeking more detailed analysis, there are over nine additional InvestingPro Tips available at https://www.investing.com/pro/FRSH, offering deeper insights into Freshworks' financial and market performance.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.