Artisan Small Cap Fund Exits Freshworks (FRSH) Over AI Transition Concerns, Cites Potential for Reduced Employment Levels.

Artisan Partners sold Freshworks (FRSH) due to concerns over the effectiveness of AI transition. The fund highlighted the company's shift from seat-based to enterprise-based pricing, and the potential for AI to improve customer performance and reduce employment levels. Despite a 15.07% 52-week gain, the fund ended its investment campaign due to these concerns. Freshworks reported Q2 revenue growth of 18% YoY, with a non-GAAP operating margin of 22% and adjusted free cash flow margin of 27%.

Freshworks (FRSH) has been in the spotlight recently as Artisan Partners sold its stake in the company, citing concerns over the effectiveness of the AI transition. The fund highlighted Freshworks' shift from seat-based to enterprise-based pricing and the potential for AI to improve customer performance and reduce employment levels. Despite a 15.07% gain over the past year, the fund ended its investment campaign due to these concerns [1].

Freshworks reported a robust Q2 performance with revenue growth of 18% year-over-year (YoY), a non-GAAP operating margin of 22%, and an adjusted free cash flow margin of 27% [1]. These figures underscore the company's financial health and growth trajectory. However, the AI transition, which is a key driver of Freshworks' future, has been a point of contention.

Oppenheimer analyst Brian Schwartz reiterated an Outperform rating on Freshworks stock following investor meetings with the company’s CFO. The analyst highlighted the firm's extensive market opportunity and strong momentum in AI-driven solutions, emphasizing Freshworks’ appeal to investors seeking exposure to AI [2]. This endorsement underscores growing confidence in Freshworks’ AI momentum, but it does not materially accelerate the short-term catalyst or diminish immediate risks, particularly around competitive threats from larger enterprise SaaS vendors [2].

The most relevant recent announcement is the next-generation Freddy Agentic AI Platform, introduced in June. This upgrade is significant as it directly supports Freshworks’ efforts in AI monetization, a key area flagged by both management and analysts as pivotal for the company’s near-term growth and for shaping investor perception of its potential to capture more share in its market [2].

Freshworks' outlook anticipates $1.1 billion in revenue and $148.5 million in earnings by 2028, implying a 12.3% annual revenue growth and a $203.4 million increase in earnings from the current level of -$54.9 million [2]. This suggests a promising long-term growth narrative, but investors should be aware of the uncertainties around AI adoption and the company's ability to monetize these advanced features.

While AI-driven revenue expansion is a key catalyst, widely differing expectations show just how much investors’ confidence can diverge. Simply Wall St Community members have set fair value estimates for Freshworks from US$11.30 to US$28.04, offering five distinct views [2]. This divergence highlights the need for investors to consider multiple perspectives before making a decision.

References:
[1] https://finance.yahoo.com/news/investors-reacting-freshworks-frsh-analyst-101126285.html
[2] https://finance.yahoo.com/news/investors-reacting-freshworks-frsh-analyst-101126285.html