We recently compiled a list of the 14 Best New Tech Stocks To Buy Now. In this article, we are going to take a look at where Freshworks Inc. (NASDAQ:FRSH) stands against the best new tech stocks to buy.
Tech Stocks Should Not Be Divested From
Tech stocks have long gained the attention of investors, with tech giants helping the S&P 500 climb a staggering 400% from 2009 to 2022. The Nasdaq 100 index did even better, surging over 700% in the same period.
However, the first half of 2022 saw a brutal market correction, the worst in 50 years for Wall Street. Geopolitical tensions, skyrocketing energy prices, and rising interest rates all played a part. Tech stocks took a heavy hit, with large tech companies dropping as high as 39% at one point.
Tech stocks are risky investments. When money was cheap during the pandemic, people borrowed a lot and invested in tech and crypto. This made the prices go up very high, overvaluing the tech sector. But when central banks raised interest rates, people started selling tech, which made the prices go down.
Earlier this week, we posted an article 10 Best Emerging Tech Stocks to Buy Now, where Mad Money host and former hedge fund manager Jim Cramer said that tech stocks should not be divested from. Here’s an excerpt from that article:
“He (Cramer) believes that major technology firms, which are integral to ongoing robust trends like data centers and accelerated computing, should be viewed as attractive buying opportunities when the market weakens, instead of the opposite sentiment…. September is historically the weakest month for the market, with consistent profit-taking. But, he sees this as a circular argument rather than a sign of an economic downturn. He believes the broader selling pressure in September is due to tech stocks meeting but not exceeding expectations.”
This is especially important to absorb as we see more and more analysts move away from the anticipation of a recession. Anastasia Amoroso, iCapital chief investment strategist, says that despite signs of a weakening labor market, such as rising unemployment and increased layoffs, she does not foresee an imminent recession. The market is expecting a 25-basis point rate cut from the Fed, possibly a larger 50-basis point cut if economic indicators worsen.
The economy is still growing at a rate of 2%, although it’s slower than before. Amoroso noted that key economic indicators do not suggest a high probability of a recession. While the market is cautious, there is potential for a positive outlook. Rate cuts and a slowing economy could lead to a more favorable market environment.
IPO Outlook
EY Global IPO Trends Q2 2024 reported that in the first half of 2024, global IPO activity experienced a downturn, with volumes declining by 12% (551 listings raising a total of $52.2 billion in capital) and proceeds declining by 16% compared to the previous year.
For the first time in 16 years, the EMEIA region reclaimed the top spot in terms of global IPO market share by number of deals. Industrials emerged as the leading sector in terms of the number of IPOs, while the technology sector raised the most capital through IPOs.
Earlier this year in May, Goldman Sachs Chair and CEO, David Solomon, at a Summit in France, said he is concerned that fewer companies are going public but expects IPO activity to pick up in the second half of 2024.
Solomon provided insights into the recent volatility in equity markets and noted that trillion-dollar companies were experiencing significant swings of up to 10% post-earnings. He acknowledged that such volatility could stimulate business activity, but expressed concerns about the potential narrowing of public markets.
He believes hyper-scalers have grown due to their competitive edge and recent tech advancements. Despite market volatility, he trusts in its efficiency and the importance of public markets for capital allocation and transparency.
Solomon expressed concern over the declining number of public companies due to abundant private market capital and emphasized the need for open, inclusive public markets. While the IPO market has recently revived, he anticipates a gradual increase in activity in the second half of 2024, going into 2025, though less intense than in 2021. However, the trend of companies staying private longer contributes to the overall decline in publicly traded entities.
Recently, CNBC’s Deidre Bosa talked about the significant energy demands of AI and the efforts of tech giants to address this growing need. She highlighted some recent big-tech investments in data centers and nuclear power facilities to back up her claim.
Jensen Huang admitted the related high energy costs but noted AI’s potential to develop energy-saving solutions. Bosa and Huang agree that public-private partnerships are crucial for addressing AI’s energy consumption. While training AI models is energy-intensive, the long-term benefits in areas like healthcare, climate, and grid management outweigh the costs. Both believe AI can revolutionize energy efficiency through innovative solutions.
Amoroso’s insights suggest that the overall economic outlook does not indicate a recession, while Bosa and Huang foresee higher tech investments due to growing AI demand. So with caution and strategic adjustments in investment approaches, potential investment risks can be avoided in the tech sector
Methodology
We used stock screeners to look for companies that went public in the past 3 years. We sorted our screen by IPO date and market cap and looked through the top 30 stocks that went public in the last 3 years and are trading over $1 billion. We then selected 14 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Freshworks Inc. (NASDAQ:FRSH)
Market Capitalization as of September 13: $3.38 billion
Number of Hedge Fund Holders: 33
Freshworks Inc. (NASDAQ:FRSH) is a cloud-based SaaS company that provides tools for customer relationship management, customer support, IT service management, human resources management, and e-commerce marketing. As of October 2023, the company had over 60,000 business clients.
The company grew revenue to $174.13 million in Q2 2024, achieving a 20.02% year-over-year increase. Notable new customers in this period include Kayak and Paul Smith UK. In June, it acquired Device42, enhancing its IT asset management capabilities.
Management says that the company’s customers prioritize AI-driven automation, simplicity, rapid impact, and flexibility in solutions. The IT and employee experience solutions, boasting over $340 million in ARR and 30% year-over-year growth, remain the largest segment.
It also secured 19 new and expansion deals over $100,000 and reached a six-quarter high win rate against its largest competitor in the second quarter. Some important clients using employee experience software include Nucor Steel and Carrefour.
The company is seeing great traction in the AI category, with Freddy Copilot’s adoption growing significantly. Customers are seeing productivity improvements of 30% with Freddy Copilot. European travel company Digitrips improved response times to customer inquiries by nearly 300% using Freddy Copilot.
The company is driving strong customer adoption of its AI products, with customer experience solutions generating approximately $350 million in ARR and experiencing mid-to-high single-digit growth. By simplifying product experiences and streamlining go-to-market processes, it is well-positioned to accelerate growth.
33 hedge funds hold long positions in the company as of this quarter, with a total of 3,134,600 shares. Renaissance Technologies has the largest position with a stake that amounts to $39,778,074.
ClearBridge SMID Cap Growth Strategy stated the following regarding Freshworks Inc. (NASDAQ:FRSH) in its first quarter 2024 investor letter:
“Software development company Freshworks Inc. (NASDAQ:FRSH), whose products include customer service, operations and customer relationship management applications, also saw its share price drift lower as investors began to worry that Freshworks was no longer an AI beneficiary, though we don’t believe this to be the case.”
Overall FRSH ranks 7th on our list of the best new tech stocks to buy. While we acknowledge the potential of FRSH as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than the stocks on our list but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
