Freshworks IPO Is Really Worth Your Attention

seekingalpha2021-09-03

Summary Freshworks filed an F-1 on August 27, 2021, intending to list its stock on NASDAQ under the ticker symbol "FRSH". Being a direct competitor to Salesforce, FRSH has some advantages that can ...

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Comments

JY00
2021-09-03
JY00
What
STSL
2021-09-03
STSL
Like pls
- JY00:
  Yay
- bananafruit:
  Ok
Simplewind
2021-09-03
Simplewind
Pls like. Thanks
- crumpled:
  ok

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(FRSH) filed anF-1 formon August 27, 2021, intending to list its stock on the NASDAQ. Being a direct competitor to Salesforce(NYSE:CRM), FRSH has some advantages that can boost its valuation immediately after the listing. We do not know the number of issued shares yet, therefore, we cannot estimate the fair value of the stock at the moment. However, if Freshworks' Price-to-Sales (TTM) turns out to be <8x when the share count is known, then FRSH will become undervalued and can show a strong rally before the end of the lock-up period.\nQuick business description, latest financials, and addressable market\nIn general, Freshworks offers a range of products to help businesses manage their customers, such as a messaging platform, an AI-powered chatbot for customer support, and call center solutions that promise shorter latency. The platform also allows you to automate routine, repetitive tasks and manage various HR functions such as hiring, onboarding, and tracking employee data.\nThere are 3 main products provided by Freshworks:\n\nFreshdesk - customer experience product;\nFreshservice - IT service management product;\nFreshsales - customer relationship management solution, which includes sales force and marketing automation.\n\nThe companyfollows a missionof \"making it fast and easy for businesses to delight their customers and employees\", which has brought Freshworks >50,000 paying customers in 10 years or operating activities:\nSource: From FRSH's prospectus\nAmong those 50,000+ customers, there are no ones that would individually exceed 10% of the company's revenue (as of June 30, 2021), or that would represent 10% or more of the consolidated accounts receivable balance. This is quite good for such a young company because usually at this stage of development, startups are heavily dependent on large customers/clients. Consequently, Freshworks reduces operational risks due to the competent distribution of sales and receivables.\nHowever, the lack of dependence on large customers does not mean at all that Freshworks does not benefit from them. As of December 2020, there were 11,570 customers, contributing more than $5,000 inannual recurring revenue(ARR) - that was 82% of total ARR. In 6 months, as of June 31, 2021, this type of customer increased by 15.18%, and now represents 84% of the total ARR. This improvement can mean only one thing - the number of new customers is getting up significantly and what's even more importantly - the customer base is getting better (simply bringing more revenues). The year-on-year growth is even more striking:\nSource: From FRSH's prospectus\nObviously, such a rapid expansion could not but affect Freshworks' financials. The best way to demonstrate that is through a common-size analysis of the profit and loss statement:\nSource: Author's calculations based on FRSH's prospectus\nThe gross profit in 1H 2021 increased by 54.17%, YoY, while sales got up by 52.92% for the same time period. That fact led to the gross profit margin expansion by 0.64%. G&A and R&D costs cuts enabled the company to show a significant improvement in EBIT and net income margins. The reduction of net losses by ~6x in just 6 months speaks volumes - first of all, that the company has every chance to start bringing in net profit by the end of this year.\nOne of Freshworks' biggest strengths lies in the workforce. Most of the employees are located in India, which does not prevent the company from providing services for businesses from more than 120 countries. According to the prospectus, 45% and 40% of all customers are located in the US and EMEA, respectively. Thus, having a cheap labor force (the median salary in the IT sector in Indiais several times lower than in the US and Europe), Freshworks serves developed markets, which pay significantly more than is required to cover the largest part of the COGS - specialists' salaries. That's why the gross profit margin is >79%, which is quite rare for an IT startup. Therefore, I believe that further optimization of marketing costs after the IPO will greatly affect profitability - while the advertising campaign for this placement takes place, this expense item takes up >54% of the total sales, which is too much and cannot last forever.\nThe company already brings free cash flow, which almost tripled in 1H 2021, YoY:\nSource: From FRSH's prospectus\nNow let's touch on the company's addressable market. According to the prospectus, the management has 2 points of view on that:\n\nIndustry research from International Data Corporation(IDC);\nOwn research based on internal data and analysis.\n\nAccording to the first one, Freshworks' SSM business (Freshservice) is going to operate within a $44-billion market by 2025, whereas CRM business (Freshdesk & Freshsales) will have an addressable market of $76 billion. Thus, based on IDC's data and projections, the total addressable market will be equal to $120 billion in a few years.\nThe research by the company itself comes to more conservative conclusions:\n\n <...> based on our internal data and analysis, we estimate the annual potential market opportunity for our products to be $77 billion. We calculate this estimate based on the total number of global companies using independent industry data from S&P Capital IQ and weighted average ARR of our products. We organize these companies into three cohorts based on how we organize our go-to-market efforts (SMB, Mid-Market, Enterprise). We then multiply the number of companies in each cohort by the weighted average ARR per customer for our largest product families of Freshdesk and Freshsales (CRM), and Freshservice (SSM) within each cohort, and sum the products for each cohort to arrive at our total market opportunity.\n\n\n Source: From FRSH's prospectus\n\nHowever, given the methodology of calculations, this market is likely to grow rapidly despite the more conservative conclusions of the company's internal research. First of all, this will be related to how quickly the ARR is growing - that is the key element in calculating market size. Secondly, the same customer may be interested not only in one product of the company - that will also have a positive effect on the final market opportunity.\nValuation\nAt the time of writing, it remains a mystery how many shares and at what price the company is going to issue on NASDAQ. However, we can compare the key financial metrics of FRSH with its direct competitors to figure out what kind of Price-to-Sales would be appropriate to participate in this offering.\nSo, Freshworks hasthe following peersto be compared with:\n\nSalesforce;\nZendesk(NYSE:ZEN);\nOracle(NYSE:ORCL);\nSAP(NYSE:SAP);\nServiceNow(NYSE:NOW);\nAtlassian(NASDAQ:TEAM);\nHubSpot(NYSE:HUBS)\n\nNote:I've excluded Microsoft(NASDAQ:MSFT)since it's too large.\nAfter collecting required financial information from the indicated companies, I've created a table, which is representing what kind of P/S we may consider as a \"fair\" one for FRSH:\nSource: Author's calculations based on SA data and links provided inside the table\nSo, given how fast the company's revenue is growing, its \"fair\" P/S (TTM) range can be considered from 24x to 44x. Therefore, when information about the offering price and the number of shares after the IPO appears, it will be necessary to check how much the actual Price-to-Sales ratio is lower than that given in this table - I think Freshworks will be a great buy at any multiplier below 15-20x.\nRisks to consider\nThe company lists the following risk factors in its prospectus - I have highlighted the key ones from my point of view:\n\n Source: From FRSH's prospectus\n\nThe risk factors indicated above are aggravated by extremely high competition in the CRM and SSM markets. Freshworks competes with giants which has much more scale and a wider customer base - therefore, that hold a pricing power, which might negatively impact FRSH's operating activities.\nIn addition, all speculations about the final valuation at the moment are only relative in nature - we do not know either the price or the number of shares after the planned placement, so I cannot recommend that you participate in this IPO until we know more details.\nFinal thoughts\nFreshworks has a clear and understandable mission, and the words of the CEO at the very beginning of the F-1 are truly inspiring - I recommend that you familiarize yourself with them.\nMy overall impression of the company is positive: revenue is growing at a frantic pace, >2x ahead of the peers' average values. I do not doubt that the way out of unprofitability is only a matter of time - all the signs that it's going to happen before the end of 2021 are already seen.\nIt remains only to wait for the offer price and the number of shares after the IPO in order to make an investment decision. If taking into account the new information, the Price-to-Sales multiple is below 15-20x, I'm in.","kind":"news","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":815344073,"gmtCreate":1630650232892,"gmtModify":1676530366054,"author":{"id":"3581568450429470","authorId":"3581568450429470","name":"JY00","avatar":"https://static.tigerbbs.com/b6e17ebb891eb376aff5c7eb5088602f","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3581568450429470","authorIdStr":"3581568450429470"},"htmlText":"What","listText":"What","text":"What","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/815344073","repostId":1122843364,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":815349163,"gmtCreate":1630649344853,"gmtModify":1676530365835,"author":{"id":"3586492916274801","authorId":"3586492916274801","name":"STSL","avatar":"https://static.tigerbbs.com/49e8aa4445808964ca4d2a2f3937956e","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3586492916274801","authorIdStr":"3586492916274801"},"htmlText":"Like pls","listText":"Like pls","text":"Like pls","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":3,"commentSize":2,"repostSize":0,"link":"https://ttm.financial/post/815349163","repostId":1122843364,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":5739884,"gmtCreate":1630650228255,"gmtModify":1663233332039,"authorId":3581568450429470,"author":{"id":3581568450429470,"idStr":"3581568450429470","authorId":3581568450429470,"name":"JY00","avatar":"https://static.tigerbbs.com/b6e17ebb891eb376aff5c7eb5088602f","vip":1,"currentWearingBadge":{"badgeId":"7a9f168ff73447fe856ed6c938b61789-1","templateUuid":"7a9f168ff73447fe856ed6c938b61789","name":"Knowledgeable Investor","description":"Traded more than 10 stocks","bigImgUrl":"https://static.tigerbbs.com/e74cc24115c4fbae6154ec1b1041bf47","smallImgUrl":"https://static.tigerbbs.com/d48265cbfd97c57f9048db29f22227b0","grayImgUrl":"https://static.tigerbbs.com/76c6d6898b073c77e1c537ebe9ac1c57","redirectLinkEnabled":0,"hasAllocated":1,"isWearing":1,"stampPosition":0,"hasStamp":0,"allocationCount":1,"allocatedDate":"2021.12.21","individualDisplayEnabled":0,"individualDisplaySort":0,"categoryType":1102},"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":815349163,"type":1,"supId":0,"prevId":0,"content":"Yay","text":"Yay","html":"Yay"},{"id":5739859,"gmtCreate":1630650011715,"gmtModify":1663233329530,"authorId":3581583439142650,"author":{"id":3581583439142650,"idStr":"3581583439142650","authorId":3581583439142650,"name":"bananafruit","avatar":"https://static.tigerbbs.com/4f58151b71d449711486ea1e300e563e","vip":1,"crmLevel":1,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":815349163,"type":1,"supId":0,"prevId":0,"content":"Ok","text":"Ok","html":"Ok"}],"langContent":"EN"},{"id":815329353,"gmtCreate":1630646414372,"gmtModify":1676530365444,"author":{"id":"3572867658695568","authorId":"3572867658695568","name":"Simplewind","avatar":"https://static.tigerbbs.com/5cec05c297ad50a1f25f590f1266e874","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3572867658695568","authorIdStr":"3572867658695568"},"htmlText":"Pls like.&nbsp; Thanks","listText":"Pls like.&nbsp; Thanks","text":"Pls like. Thanks","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":4,"commentSize":1,"repostSize":0,"link":"https://ttm.financial/post/815329353","repostId":1122843364,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":5739590,"gmtCreate":1630647911753,"gmtModify":1631884809469,"authorId":3581585052647581,"author":{"id":3581585052647581,"idStr":"3581585052647581","authorId":3581585052647581,"name":"crumpled","avatar":"https://static.tigerbbs.com/932b40d869faf199ec83c7dd54b1b6f3","vip":1,"crmLevel":2,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":815329353,"type":1,"supId":0,"prevId":0,"content":"ok","text":"ok","html":"ok"}],"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":60,"commentSize":3,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1122843364"}