Why is Freshworks Stock "Beaten Down" Despite Strong Q4 Results

Key Takeaways

• Freshworks (FRSH) shares are currently trading near their 52-week low, reflecting market skepticism despite a strong Q4 2025 performance and first-time full-year profitability.
• The company's robust Employee Experience (EX) segment, strategic AI integration, and expanding free cash flow present a compelling contrarian opportunity for long-term investors.
• With analysts projecting significant upside and the stock trading at a discount to its intrinsic value, Freshworks appears to be a "profitable baby thrown out with the bathwater."

Why is Freshworks Stock "Beaten Down" Despite Strong Q4 Results?

Freshworks Inc. (NASDAQ: FRSH) finds itself in a peculiar position: a software company that just reported its first profitable full year in history, yet its stock is trading near its 52-week low of $6.79. On February 26, 2026, shares closed at $7.96, a significant rebound of +9.34% from the previous day, but still far from its 52-week high of $17.69. This disconnect stems largely from a "guidance reset" that followed its Q4 2025 earnings report on February 10, 2026, where the market reacted negatively to a conservative 2026 revenue forecast.

Despite beating Q4 revenue estimates with $222.7 million (14% year-over-year growth) and achieving a non-GAAP operating margin of 19% (nearly 5 points above estimates), investors focused intently on the projected 2026 revenue growth of 13.5% to 14.5%. This figure, while healthy, failed to meet the market's elevated expectations for hyper-growth, especially in an environment obsessed with explosive AI-driven expansion. The result was a brutal sell-off, with the stock plummeting 16.38% post-earnings, triggering a wave of analyst downgrades and price target reductions from institutions like Jefferies and Wells Fargo.

The prevailing narrative suggests that Freshworks, known for its uncomplicated and affordable software for the mid-market, might be losing ground to larger, AI-native competitors. This fear has led to multiple compression within the enterprise software sector, punishing companies that aren't demonstrating "explosive" AI revenue. However, a deeper dive into Freshworks' financials reveals a company undergoing a significant transformation, prioritizing disciplined execution and profitability alongside strategic growth, which the market may be overlooking in its short-term focus.

What Did Freshworks Actually Achieve in Q4 2025 and FY 2025?

Freshworks' Q4 2025 and full-year 2025 results paint a picture of a company executing a disciplined strategy, achieving significant financial milestones that the market's initial reaction seems to have undervalued. The company not only surpassed its own expectations but also delivered on a long-term goal: achieving profitability for the first time in its history for the full year 2025. This is a crucial inflection point often sought by growth-oriented SaaS businesses.

For the full year 2025, Freshworks reported total revenue of $838.8 million, representing a solid 16% year-over-year growth. More impressively, the company generated record free cash flow of $223.1 million for the year, with a robust $56.2 million in Q4 alone, translating to a 25% free cash flow margin in the quarter. This strong cash generation is a testament to its operational efficiency and disciplined investment strategy. The non-GAAP operating margin in Q4 reached 19%, significantly exceeding estimates and highlighting improved cost management.

Furthermore, the company's Annual Recurring Revenue (ARR) grew to $907 million, an 18% increase year-over-year, indicating continued customer acquisition and expansion. The Net Dollar Retention Rate stood at a healthy 108% (as-reported), demonstrating strong customer loyalty and upsell potential. Freshworks also boasts an impressive TTM gross margin of 85.0%, underscoring the inherent profitability of its software-as-a-service model. These metrics collectively demonstrate a company that is not only growing but doing so with increasing efficiency and a solid financial foundation, a narrative often overshadowed by short-term growth projections.

Where is Freshworks Finding Its Growth, and How is AI Playing a Role?

Freshworks' growth story is increasingly bifurcated, driven by distinct customer experience (CX) and employee experience (EX) segments, with artificial intelligence (AI) emerging as a critical accelerant across both. While the market fixated on overall revenue guidance, the underlying engines of growth reveal significant strategic progress and untapped potential. The EX business, in particular, is a standout performer, reaching $510 million in ARR with a robust 26% year-over-year growth. This segment is capitalizing on a massive opportunity as mid-market and enterprise organizations seek alternatives to expensive, complex legacy platforms.

The company's strategy in EX involves evolving Freshservice into a unified service platform, integrating capabilities like IT Service Management (ITSM), IT Operations Management (ITOM) through the FireHydrant acquisition, and IT Asset Management (ITAM) with Device42. This comprehensive approach expands its addressable market to an estimated $8 billion, offering a compelling value proposition to CIOs looking for sophisticated yet fast-to-implement solutions. The pipeline for deals over $100,000 has reached record levels, indicating strong upmarket momentum and validation of this unified platform strategy.

Crucially, AI is not just a buzzword for Freshworks; it's a monetizable growth driver. The company's Freddy AI has already surpassed $25 million in annual recurring revenue, serving over 8,000 paying customers. Management expects Freddy AI to reach $100 million in ARR by 2028, driven by the recent launch of its AI Agent Studio and increased pricing. Freshworks is positioning Freddy AI as the primary AI solution for mid-sized enterprises, making AI a core sales motion rather than just a feature. This focus on practical, monetized AI adoption within its existing customer base, rather than speculative "AI hype," differentiates its approach and offers substantial penetration opportunities given its total customer count of 75,000.

Is Freshworks Undervalued? A Look at Analyst Sentiment and Valuation Multiples

The market's reaction to Freshworks' 2026 guidance has created a significant valuation gap, with many analysts now viewing the stock as undervalued. Despite the post-earnings sell-off, the consensus analyst rating for FRSH remains a "Buy," with 18 analysts covering the stock (9 Buy, 9 Hold). The average analyst price target stands at $11.43, implying a substantial 43.6% upside from the current price of $7.96. Oppenheimer, for instance, maintains an "Outperform" rating with a $15.00 price target, suggesting a remarkable 88.4% upside potential. Even the lowest analyst target of $8.00 is barely above the current trading price, indicating limited downside risk according to Wall Street.

From a valuation multiples perspective, Freshworks appears attractive, especially when considering its profitability pivot. The stock trades at a TTM P/E of 12.25x, a P/S of 2.77x, and a P/FCF of 9.18x. These figures are considerably lower than historical averages for high-growth SaaS companies and suggest the market is pricing in a "worst-case scenario." For comparison, the company's historical P/E averages were 23.6x (one year) and 134.1x (three years), indicating significant multiple compression.

A discounted cash flow (DCF) analysis by Simply Wall St suggests an estimated intrinsic value of approximately $25.18 per share, implying Freshworks is priced at a 72.7% discount to this estimate. TIKR's Advanced Valuation Model, using a forecast of 14.5% annual revenue growth and 21% operating margins, projects the stock could rise to $11.70 within 2.9 years, assuming a 12x price-to-earnings multiple. This represents a 47% total return from current levels. The consensus among these models is that Freshworks is fundamentally undervalued, with its strong cash generation and improving unit economics not fully reflected in its current stock price.

What Are the Key Risks and Opportunities for Freshworks Investors?

Investing in Freshworks at its current valuation presents a compelling contrarian opportunity, but it's crucial to acknowledge the inherent risks alongside the significant upside potential. The primary risk remains market sentiment, particularly the ongoing "AI hype" cycle. If Freshworks' AI monetization doesn't accelerate as quickly as some investors hope, or if its 2026 guidance proves to be genuinely conservative without a subsequent "beat and raise," the stock could continue to face pressure. Competition from established firms like ServiceNow and Salesforce, as well as emerging AI-native startups, poses a constant threat to market share and pricing power.

However, the opportunities for Freshworks are substantial. The company's disciplined execution on its profitability pivot is a major tailwind. Achieving full-year profitability and generating record free cash flow demonstrates a mature business model capable of self-funding growth. The strong performance of the EX segment, with its unified platform strategy and successful integrations like Device42 and FireHydrant, positions Freshworks to capture a larger share of the mid-market, displacing legacy providers. This expansion into higher-value enterprise deals, evidenced by the growth in customers with over $100,000 in ARR, is a critical long-term driver.

The burgeoning Freddy AI business, with its $25 million ARR and clear path to $100 million by 2028, offers a tangible, monetized AI story that could eventually re-rate the stock. If Freshworks can demonstrate consistent progress in AI adoption and prove that its 2026 guidance was indeed conservative, the market could quickly re-evaluate its valuation. The current depressed share price, trading at a significant discount to analyst targets and intrinsic value estimates, offers a wide margin of safety for investors willing to look beyond short-term market noise and bet on fundamental strength and strategic execution.

The Path Forward for Freshworks

Freshworks has navigated a challenging market environment, emerging with a stronger financial foundation and a clear strategic roadmap. While the market has focused on top-line deceleration, the underlying story is one of disciplined growth, profitability, and strategic AI integration. For contrarian investors, the current valuation presents a compelling entry point, offering significant upside potential as the company continues to execute on its unified platform and AI monetization strategies. The "profitable baby thrown out with the bathwater" narrative holds strong, suggesting that patience could be richly rewarded.

Want deeper research on any stock? Try Kavout Pro for AI-powered analysis, smart signals, and more. Already a member? Add credits to run more research.