On Thursday, Freshworks Inc. (NASDAQ:FRSH), a customer engagement software company, experienced a downgrade in its stock rating by a leading firm. The company was downgraded from Outperform to Perform, signaling a shift in the analyst's perspective on the stock's future performance.
The downgrade was attributed to several factors affecting Freshworks' business. The firm cited concerns over small and medium-sized business (SMB) headwinds and a recent abrupt change in leadership as key reasons for the revised rating. Furthermore, the firm removed its $26 price target for Freshworks, indicating uncertainty about the company's valuation in the near term.
The analyst noted several positive aspects of Freshworks, including its scale, the momentum in its IT service management (ITSM) sector, and strong margin growth. The recent appointment of new CEO Dennis Woodside (OTC:WOPEY) was also seen as a positive development. However, these factors were overshadowed by concerns about the company's customer service business and its product-led growth strategy, which are believed to be facing more structural challenges.
The adoption of generative artificial intelligence (AI) was specifically mentioned as a potential threat to the company's growth. This technology could lead to seat-compression, which would affect Freshworks' revenue from per-user subscriptions. The analyst also pointed to another quarter of weakness in the company's inbound sales motion as a cause for concern.
Looking ahead, the analyst suggested that Freshworks is now a transition story, with new leadership facing execution challenges that could delay the reinvigoration of top-line growth. The company's financial guidance for 2025 and 2026 may require adjustments to meet the Rule-of-40—a metric used to assess a company's balance between growth and profitability—or may need to be reset altogether. Additionally, the lingering concerns over AI continue to pose a risk to the stock's performance.
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