Freshworks Shows Resilience Amid SaaS Selloff, But Growth and Retention Challenges Persist

What happened

Freshworks Inc. delivered strong Q4 and full-year results with 14-16% revenue growth, defying a 40% stock price decline during the broader SaaS sector downturn. The company is aggressively integrating AI through Freddy AI, shifting to usage-based fees and winning new business to differentiate itself in a competitive market. However, net dollar retention has weakened to 103%, reflecting macro pressures and intense rivalry from giants like Salesforce and ServiceNow. Financially, Freshworks exhibits improving non-GAAP profitability and rising free cash flow, supported by high gross margins and a net-cash balance sheet, yet GAAP losses remain. With the stock trading at a PE below 11 and price-to-cash-flow of 8.4, the valuation appears compelling, but investors must weigh this against ongoing operational risks.

Implication

The low valuation metrics suggest market pessimism may be overdone, offering a margin of safety for value investors if growth sustains. However, declining net dollar retention indicates persistent customer expansion challenges that could hinder revenue targets without improvement. Freshworks' AI integration and cash flow strength provide a buffer, but the company must prove it can outmaneuver larger competitors in an AI arms race. The solid balance sheet and completed buyback enhance financial flexibility, yet the lack of GAAP profitability limits valuation upside until proven. Ultimately, while the risk-reward profile is attractive, success depends on execution in stabilizing retention and leveraging AI for sustainable differentiation.

Thesis delta

The new article reinforces the potential buy thesis by highlighting strong operational performance and undervaluation, aligning with the DeepValue report's view. However, it does not shift the core risks, such as net dollar retention erosion and competitive threats, which remain critical watch items. Thus, the thesis remains a cautious buy with an unchanged focus on monitoring execution and competitive dynamics.