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Will Freshworks stock rise further amid competition?

Freshworks Inc. [FRSH] hit global headlines when it rose 32% after collecting $1bn in an initial public offering on 22 September. It commanded $38 a share — was above its marketed range.

But its second day of trading didn’t see quite the same momentum, with the Freshworks stock falling by 0.02%. As of 30 September’s market close, the stock is down 1.86% in all.

The coming days will show if Freshworks has any more engine power left, but there are strong signs of high investor interest.

 

Freshwork’s competition

Linked to its performance is the role of its more entrenched rival, Salesforce [CRM], which gave a fight climbing 7.21% in a day to reach $277.86 on Thursday 23 September, following Freshwork’s debut. The market signalled both that it has enough appetite for companies selling business software, and that the entry of a rival would not alter portfolio allocation for the existing player.

Still, Salesforce is a much larger company, with a market cap of $264.4bn as of 1 October. Freshworks still has a long way to go with its intra-day market cap at $12.2bn on the same date.

What impressed the market about Freshworks is its sharp revenue growth of 40% during 2020 — the pandemic period. The India-based company, which has since developed solid roots in the Silicon Valley, saw its revenue rising to $169m in the first half of 2021 compared to $110m in the same period last year. With 52,500 customers, the company has managed to shrink its net loss to $9.8m in 2020, down from $57m a year back.

“So, now it is our moment to climb the sky," Freshworks founder and CEO Girish Mathrubootham (pictured above) said, quoting from an Indian film, Padayappa.

“Freshworks is the company that wasn't supposed to win. Whether we could differentiate ourselves in crowded markets, or compete with larger players, or build a global SaaS company from India, the doubts were always there. And people were not shy about telling me!” - Freshworks founder & CEO Girish Mathrubootham

 

"Freshworks is the company that wasn't supposed to win. Whether we could differentiate ourselves in crowded markets, or compete with larger players, or build a global SaaS company from India, the doubts were always there. And people were not shy about telling me!" wrote Mathrubootham in his blog on Thursday 23 September.

“There were doubts about the company’s rise beyond a point but he focused on executing projects. We realised the profound meaning of what Steve Jobs once said, ‘Stay hungry, stay foolish’,” he added.

“We have great respect for Salesforce and what they’ve built,” Mathrubootham said in an interview with Digital Commerce 360. “We would love to continue to build Freshworks to greater heights.”

 

Salesforce isn’t spooked

Salesforce CEO Marc Benioff spoke about the strong prospects for his company at a conference on Tuesday 21 September. “You look at the incredible market share that Salesforce has been able to achieve, it is because of our trailblazers. You look at the incredible business performance that we’ve been able to achieve and $26.3bn this year in revenue, it’s because of the trailblazers and we know that,” he said, referring to Salesforce’s ecosystem of customers and partners.

Both companies are California based. Salesforce management works out of the company headquarters in San Mateo, California, while Freshworks — originally named Freshdesk — moved its head office from Chennai in India to San Bruno, California in 2017 as part of a rebrand.

The Freshworks website lists more than 200 major brands, including Bridgestone, Harveys and Synergy, among its customers. It is competing with Salesforce in the market for customer relations management and an assortment of business software and services.

“You look at the incredible business performance that we’ve been able to achieve and $26.3bn this year in revenue, it’s because of the trailblazers and we know that” - Salesforce CEO Marc Benioff

 

What’s ahead for the Freshworks share price?

“Based on the company's financials, its 2020 price-to-sales multiple is 40.0x,” wrote Ambrish Shah in Market Realist. “While that multiple might look high in absolute terms, Freshworks is expected to grow its top line significantly in the coming years. To compare, Salesforce, ServiceNow [0L5N], and Atlassian [TEAM] are trading at next-12-month EV-to-sales multiples of 8.9x, 19.7x, and 40x, respectively”.

Among investors who made a quick profit out of the Freshworks listed 32% above the issue price, is CapitalG, the investment arm of Alphabet [GOOG]. “It’s hard not to feel great,” said Gene Frantz, the CapitalG partner who led the Freshworks investment, in an interview on Wednesday 22 September.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

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