Freshworks' Stock Decline: A Mispriced Opportunity Amid AI-Driven Growth?

The recent 20.3% year-to-date decline in Freshworks Inc. (FRSH) has sparked debate among investors about whether the stock is undervalued. With the company reporting strong Q3 2025 earnings and accelerating AI integration, the question arises: Is this a buying opportunity, or does the decline reflect legitimate concerns about execution risks?

Valuation Metrics Suggest Undervaluation

Freshworks' forward Price-to-Earnings (P/E) ratio of 16.52 and Price-to-Book (P/B) ratio of 3.28 appear attractive when compared to broader SaaS industry benchmarks. The median enterprise SaaS EV/TTM revenue multiple stands at 3.9x according to PitchBook, while the median EV/Revenue multiple for public SaaS companies is 6.1x as reported by Aventis Advisors. These figures indicate that Freshworks trades at a discount to its peers, particularly given its 15.3% year-on-year revenue growth and 25.5% earnings-per-share beat in Q3 2025.

The company's P/B ratio of 3.28 also aligns with historical lows, suggesting potential mispricing. For context, the broader Software & Programming industry has a P/B ratio of 46.38 according to CSIMarket, highlighting SaaS's premium valuation. Yet Freshworks' metrics remain anchored to conservative multiples, even as it demonstrates improving profitability and a 21% non-GAAP operating margin.

AI Integration: A Catalyst for Growth

Freshworks' strategic focus on AI has positioned it as a leader in enterprise software innovation. At its Refresh event in Q3 2025, the company launched AI-powered capabilities in Freshservice, including Freddy AI Agents and integrations with DEX platforms like Riverbed Aternity. These tools enable proactive issue resolution, reducing first-response times from over six hours to under four minutes.

The AI-driven enhancements extend to Freshdesk, where the Command Center centralizes customer conversations and automates data retrieval, improving resolution rates. Vertical AI Agents tailored for e-commerce, fintech, and logistics have further streamlined workflows, resolving 80% of customer queries instantly.

Financially, these initiatives are paying off: AI ARR is projected to grow from $20 million to $100 million in three years, and the company's net dollar retention rate hit 105% according to The Fool.

Investor Sentiment: Optimism vs. Caution

While Freshworks' earnings beat and AI progress have driven a 1.28% post-earnings rally, broader market sentiment remains mixed. Analysts have downgraded the stock to "Neutral," citing concerns over slowing growth and limited AI monetization momentum as noted by SimplyWall St. The acquisition of FireHydrant, announced without disclosed financial terms, has also introduced uncertainty according to Barchart.

However, the broader AI sector's resilience offers context. Enterprise AI spending reached $37 billion in 2025 according to Menlo Ventures, with product-led growth models accounting for 27% of this spend. Freshworks' focus on AI-powered efficiency gains aligns with this trend, particularly as companies prioritize immediate productivity improvements over speculative infrastructure investments as reported by Times Online.

The Case for a Buying Opportunity

Freshworks' valuation appears to discount its AI-driven growth potential. At a forward P/E of 16.52 and a P/B of 3.28, the stock trades at a 35.9% discount to its 52-week high according to Barchart, despite outperforming earnings estimates and expanding AI capabilities. The company's 13-14% revenue growth guidance for 2026 and a target operating margin exceeding 23% by Q4 2026 further justify optimism.

Yet risks persist. The SaaS industry's median EV/Revenue multiple has contracted from 6.5x in 2023 to 6.1x in 2025 according to PitchBook, reflecting macroeconomic pressures. Additionally, the AI sector's volatility-exemplified by the Nasdaq's late-2025 decline as noted by Times Online-underscores the need for caution.

Conclusion

Freshworks' stock decline may represent a mispriced opportunity for investors willing to bet on its AI-driven transformation. The company's valuation metrics, coupled with its strategic AI integration and strong earnings momentum, suggest undervaluation. However, execution risks and broader market volatility mean this is not a risk-free bet. For those with a medium-term horizon and a tolerance for SaaS sector volatility, Freshworks' discounted multiples and AI-led growth trajectory warrant closer scrutiny.