Freshworks (FRSH): AI-Driven SaaS Gem with Undervalued Upside

The SaaS sector has long been a battleground for growth and innovation, but few companies today offer the combination of strong financial discipline, transformative AI integration, and compelling valuation as Freshworks (FRSH). As the global leader in customer and employee experience software, Freshworks has positioned itself at the intersection of AI-driven efficiency and profitability improvements. Recent financial results and strategic moves suggest this undervalued SaaS stock could be primed for a revaluation.

Financial Momentum: Profitability Gains Take Center Stage

Freshworks' Q1 2025 results marked a turning point in its evolution from a high-growth SaaS company to a financially resilient one. Revenue surged 19% YoY to $196.3 million, with adjusted free cash flow hitting $55.4 million—a 28% margin that underscores operational efficiency. The non-GAAP operating margin expanded to 24%, a 10 percentage point improvement from Q1 2024, while GAAP net loss narrowed to $0.00 per share, reflecting significant margin management progress.

The company's high-value customer base (those contributing >$5k ARR) grew 13% YoY to 23,275, a testament to its ability to upsell into existing accounts. Net dollar retention remained stable at 105%, indicating healthy customer retention. Freshworks also secured wins with prominent clients like All3Media and Freudenberg Group, while its new global partner program aims to amplify distribution through resellers.

The AI Catalyst: Freddy Copilot and the "Outcome-Driven" Shift

Freshworks' AI initiatives, led by its Freddy Copilot tool, are the linchpin of its growth story. Unlike generic AI solutions, Freddy Copilot is embedded into Freshworks' customer and employee experience platforms, automating repetitive tasks (e.g., ticket routing, response generation) while generating actionable insights for clients. CEO Dennis Woodside emphasized the shift from “output to outcome,” meaning AI now focuses on measurable business results (e.g., reduced resolution times, higher customer satisfaction) rather than just processing speed.

This strategic focus is already bearing fruit. Freshworks reported that AI-driven upselling has become a key driver of customer expansion, with EX (employee experience) now contributing over 50% of ARR. The EX segment's growth aligns with broader trends in enterprise software, where companies prioritize tools that boost workforce productivity—a market projected to hit $8.5 billion by 2027.

Valuation: Undervalued Relative to Growth and Peers

Freshworks' valuation multiples suggest it's trading at a discount to both its historical performance and sector peers. As of June 2025, its P/S ratio is 5.59, down from a 12-month average of 6.22 and a three-year average of 7.49. Its EV/Revenue multiple of 4.5x lags behind private SaaS sector averages (6.1x) and even the lower end of Enterprise SaaS multiples (9.4x for companies with $10–75M in revenue).

While the company's negative FY EBITDA (-$110 million) raises concerns, its LTM EBITDA of $136 million (18% margin) indicates a clear path to profitability. The Rule of 40 metric (which combines growth and profit margins) is at -13%, but this is skewed by prior-year losses. The Bessemer Rule of X (50%)—which balances growth and profit—suggests Freshworks is on track to optimize its margin trajectory.

Risks and Opportunities

• Upside: If Freshworks can sustain 13–14% revenue growth (its full-year 2025 guidance) and improve EBITDA margins further, its valuation could expand toward sector norms. A successful AI-led EX platform rollout could also unlock cross-selling opportunities with its 23,000+ enterprise customers.
• Downside: Macroeconomic uncertainty and competition from rivals like Zendesk and Salesforce remain risks. However, Freshworks' $1 billion cash reserves and focus on cost discipline provide a buffer.

Investment Takeaway: Buy the Dip, Target 2025 Revaluation

Freshworks is a rare SaaS stock offering both growth and margin expansion at a discounted multiple. With AI adoption accelerating and EX software demand surging, the company is well-positioned to capitalize on secular trends. At its current price of $15 (market cap $4.4B), Freshworks trades at a significant discount to peers, even considering its negative FY EBITDA.

Buy recommendation: Investors with a 12–18 month horizon should consider accumulating FRSH at current levels. A target price of $22–$25 (P/S 7.5–8.5x) aligns with sector averages if growth and margins improve as expected. Monitor Q2 2025 results for further margin progress and AI adoption metrics.

In a crowded SaaS landscape, Freshworks' blend of execution, innovation, and valuation makes it a compelling contrarian bet. The AI revolution isn't just a buzzword here—it's fueling a revaluation that could finally put this gem on the radar of growth investors.