What Happened:
Shares of business software provider Freshworks (NASDAQ: FRSH) fell 5.2% in the morning session after a broader market downturn as the Dow fell for the third straight day amidst surging yields. The decline was influenced by stronger-than-expected December 2023 retail sales, up 0.6% from November 2023 (versus expectations for 0.4% growth), potentially challenging expectations of aggressive Federal Reserve rate cuts in 2024. This marks a shift from the more optimistic market sentiment at the end of 2023, as more market data revealed inflation is cooling. However, recent market pullbacks indicate increased uncertainty in 2024, suggesting caution as stocks might be overbought.
As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. With lower interest rates, investors can apply higher valuations to their stocks. No wonder so many in the investment community are optimistic about 2024. We at StockStory remain cautious, as following the crowd can lead to adverse outcomes. During times like this, it's best to own high-quality, cash-flowing companies that can weather the ups and downs of the market.
The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Freshworks? Access our full analysis report here, it's free.
What is the market telling us:
Freshworks's shares are quite volatile and over the last year have had 20 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The biggest move we wrote about over the last year was 6 months ago, when the stock gained 15.9% on the news that the company reported a "beat and raise" quarter. Second-quarter results surpassed analysts' expectations for revenue, operating profits, free cash flow and earnings per share (EPS). The number of customers spending more than $5k in annual recurring revenue (ARR) continued to grow and came in ahead of Consensus. Retention rate was also stable. Moving ahead, Revenue and EPS guidance for the next quarter and the full year were roughly in line with expectations. The company touched on its AI initiatives stating, "In Q2, we launched new generative AI enhancements across our product lines and outperformed our estimates across all our key financial metrics. I'm excited about the opportunity for companies to take advantage of our software to delight their customers and employees." Overall, it was a positive quarter for the company, with a decent beat of key estimates and encouraging guidance.
Freshworks is up 0.7% since the beginning of the year, and at $22.27 per share it is trading close to its 52-week high of $24.48 from December 2023. Investors who bought $1,000 worth of Freshworks's shares at the IPO in September 2021 would now be looking at an investment worth $467.72.
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