Please ensure Javascript is enabled for purposes of website accessibility

Why Freshworks Stock Dropped 18% This Week

By Demitri Kalogeropoulos – Nov 5, 2021 at 9:20AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The end of a lock-up period added to selling pressure on the stock.

What happened

Software specialist Freshworks (FRSH 3.60%) trailed the market this week, with losses of around 18% through trading on Thursday. That slump was powered by news of losses in the company's fiscal third quarter, plus a growing pool of outstanding stock available for trading on the market.

So what

Sales landed at $97 million in the quarter that ended on Sept. 30, management said in a Nov. 2 earnings announcement. That increase beat Wall Street's expectations and translated into nearly 50% gains, year over year.

Yet investors appeared to be more concerned with the software-as-a-service (SaaS) specialist's losses and its weak cash flow trends. Freshworks burned through $4 million in Q3 and booked significant net losses.

A customer service worker using a computer and wearing a headset.

Image source: Getty Images.

Selling pressure likely also came from new shares entering the public trading markets. The terms of Freshworks' initial public offering allowed for as many as 58 million shares to open for trading on Nov. 4, ending part of its lock-up period that restricts insiders from selling stock for a time after the IPO.

Now what

Management is predicting sales of between $99 million and $101 million in the fourth quarter, Freshworks' second quarter as a public company. That growth, plus encouraging engagement metrics including high contract renewal rates, implies a strong year ahead for market share gains.

Investors have to balance that optimism against the likelihood for more losses as Freshworks invests in its growth initiatives. The stock price should stay volatile, too, as more shares become available for trading by insiders and as Wall Street tries to settle on a valuation for this young IT software business.

Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.