Issue #28

AI Meets SaaS: 2 Stocks With Explosive Growth Ahead

The digital business world is shifting fast — and two software leaders are at the heart of it.
As companies race to automate customer engagement and internal workflows, AI-powered SaaS tools are becoming the new infrastructure for modern business growth.

👉 One is redefining how small and mid-sized companies manage customer service and IT with AI-driven simplicity.
👉 The other is powering e-commerce brands with data-driven marketing and intelligent automation that turns every message into measurable revenue.
👉 Both are profitable, fast-growing, and backed by analysts with “Strong Buy” ratings.

In this edition, we spotlight Freshworks (FRSH) and Klaviyo (KVYO) — two AI-first software innovators reshaping how businesses connect, sell, and scale.

Freshworks (NASDAQ: FRSH)

Freshworks (NASDAQ: FRSH) is a leading provider of uncomplicated, AI-assisted software designed to deliver exceptional customer and employee experiences. The company has carved out a strong position in the competitive Customer Relationship Management (CRM) and IT Service Management (ITSM) markets, primarily targeting small-to-midsize businesses (SMBs) and increasingly moving up-market into the enterprise space. Its focus on ease of use, fast time-to-value, and a low Total Cost of Ownership (TCO) makes it a key enabler for the entrepreneur economy.

📦 Business Model and Revenue Streams

Freshworks operates on a Software-as-a-Service (SaaS) subscription model, providing a unified platform of products under the "Freshworks Customer Service Suite" and "Freshworks Employee Service Suite."

• Core Business: The company offers cloud-based solutions across three main product lines:
• Freshdesk (Customer Experience/CX): AI-assisted customer service software.
• Freshservice (Employee Experience/EX): AI-assisted IT Service Management (ITSM) and Enterprise Service Management (ESM) software. This is a significant growth driver, with its ARR (Annual Recurring Revenue) exceeding $480 million and growing over 20% year-over-year.
• Freshsales/Freshmarketer (Sales & Marketing): CRM and marketing automation tools.
• Revenue Streams: Revenue is primarily generated from recurring subscription fees based on the number of users, the specific products licensed, and the tier of service (e.g., standard, professional, enterprise). The company has successfully introduced AI-driven monetization with products like Freddy Copilot (agent-assist) and Freddy Self-Service (monetized per-session), which are contributing to its growing ARR.

Macroeconomic Impact

Freshworks' business is sensitive to the global macroeconomic environment, though its value proposition offers a degree of resilience:

• Headwinds:
• Customer Spending: Economic uncertainty and tighter corporate budgets can lead to reduced expansion (upsells) within existing customers, which has caused a slight decline in its Net Dollar Retention (NDR) rate (currently 105%).
• Currency Fluctuations: With a significant portion of revenue coming from international markets (e.g., Europe/Middle East/Africa at 39% of revenue), foreign currency exchange rate volatility can impact reported revenue growth.
• Tailwinds:
• Focus on Efficiency: In a challenging economy, businesses often seek out tools that increase operational efficiency and lower TCO. Freshworks' core messaging of "uncomplicated software" and strong return on investment (ROI) resonates well with cost-conscious SMBs and enterprises looking to streamline operations.
• AI Adoption: The demand for AI tools to automate customer and employee interactions is a powerful secular tailwind, directly boosting the adoption and monetization of Freshworks' Freddy AI features.

📈 Recent Performance and Corporate Developments

Freshworks has consistently surpassed analyst estimates, demonstrating a strong push toward enterprise and AI-driven offerings.

Q3 2025 Financial Highlights 💰

The company reported robust Q3 2025 results, reflecting strong execution and margin expansion:

• Total Revenue: $215.1 million, representing a 15% year-over-year growth, surpassing analyst expectations.
• Non-GAAP Net Income Per Share (EPS): $0.16, significantly beating the Zacks Consensus Estimate of $0.13.
• Profitability: Non-GAAP Operating Margin expanded to 21.0% (up from 12.8% in Q3 2024), and Adjusted Free Cash Flow Margin was 26.6%, reflecting excellent operating leverage.
• Key Metrics:
• ARR from customers > $100K: Grew 25% year-over-year, highlighting successful up-market penetration.
• Net Dollar Retention (NDR): Was 105%, a solid figure indicating that existing customers are still growing their spend, despite macroeconomic pressure.

Strategic Initiatives and Mergers 🤝

• Mergers & Acquisitions: The most notable recent deal is the acquisition of Device42 (an IT Asset Management/ITAM platform) in 2024. In Q3 2025, about half of Freshworks' top ten deals included Device42, showcasing its strategic value in attracting larger, enterprise-grade customers for ITSM needs. The cloud version of Device42 is a key future catalyst expected in Q1 2026.
• AI-First Strategy: Freddy AI products doubled year-over-year in ARR, with products like Freddy Copilot driving monetization. The company emphasizes that its AI is "enterprise-ready" because it is embedded directly within its operational software, using proprietary data and context to deliver real productivity gains.
• Enterprise Service Management (ESM) Expansion: Freshworks launched Freshservice for Business Teams as a standalone product. This allows it to sell its service management capabilities directly to non-IT departments like HR, Finance, and Legal, significantly expanding its Total Addressable Market (TAM) beyond its traditional IT entry point.

🎯 Path to Profitability and Fair Value

Path to Profitability

Freshworks is already Non-GAAP profitable and Free Cash Flow positive, demonstrating a highly efficient business model.

• Financial Discipline: The company's recent results show a clear focus on balancing growth with profitability, as indicated by its massive expansion in non-GAAP operating and free cash flow margins.
• Future GAAP Profitability: Management has reaffirmed its target for achieving GAAP profitability by the end of 2026, a critical milestone for growth-focused software companies. The path is driven by scaling high-margin AI and enterprise offerings and capitalizing on operational leverage as fixed costs are spread over a larger revenue base.

Price and Analyst Estimates 📊

• Analyst Consensus and Ratings: Freshworks currently holds a strong "Buy" consensus rating from analysts. Specifically, Zacks Investment Research gives the stock a Zacks Rank #1 (Strong Buy), indicating an expectation for strong near-term outperformance. Recent analyst sentiment has been overwhelmingly positive following the Q3 earnings beat.
• Price Targets and Fair Value:
• The average 12-month price target from a consensus of analysts is approximately $18.79 to $19.91, which suggests a substantial potential upside of over 60% from the current share price (around $11.30-$11.60).
• Many valuation models, including discounted cash flow (DCF) analyses, suggest the stock is significantly undervalued compared to its estimated fair value. Its Price-to-Sales (P/S) ratio of around 3.9x is also considered favorable compared to its peer and industry averages.

In summary, the market appears to be undervaluing Freshworks' combination of accelerating enterprise momentum, robust AI-driven growth, and clear progress toward sustained GAAP profitability.

Investor-Focused Takeaway: Is FRSH Right for Your Portfolio?

Freshworks (FRSH) is a high-growth SaaS platform in the customer and employee experience space that has successfully pivoted to a profitable, cash-generative model. The company's focus on simple, powerful, and now AI-integrated solutions makes it an essential engine for the entrepreneur and mid-market economy while its up-market strategy is gaining traction.

What to Watch in the Near Term: 📈

• AI Monetization: The sustained adoption and ARR growth of its Freddy AI products.
• NDR Stabilization: Look for its Net Dollar Retention rate to stabilize or begin to creep higher, which would signal easing macroeconomic pressure and renewed customer expansion.
• Device42 Cloud Launch: The execution and adoption of the cloud version of its Device42 ITAM platform in early 2026 as a major driver for high-value enterprise deals.

Recommendation

Freshworks (FRSH) is viewed as a compelling "Buy" based on its current undervaluation relative to analyst price targets, its confirmed non-GAAP profitability, strong free cash flow generation, and strategic positioning to capitalize on the massive, growing demand for AI-powered business software.

Klaviyo (NYSE: KVYO)

Klaviyo (NYSE: KVYO) is the leading B2C Customer Relationship Management (CRM) platform, specializing in data-driven marketing automation, primarily for e-commerce and retail brands. The company has built a powerful, unified data platform that allows businesses—from small entrepreneurs to major enterprises—to transform their customer data into highly personalized, revenue-generating email and SMS marketing campaigns. It is a critical infrastructure component for the modern, relationship-driven entrepreneurial economy.

📦 Business Model and Revenue Streams

Klaviyo’s business model is a high-growth, Software-as-a-Service (SaaS) subscription model with a key differentiator: usage-based pricing.

• Core Business: Klaviyo provides an all-in-one platform that unifies a brand’s customer data (the Klaviyo Data Platform) with its marketing channels (Email, SMS, in-app notifications, etc.). This allows businesses to trigger personalized communications based on real-time customer behavior, purchases, and preferences. The company is actively expanding its platform beyond pure marketing into broader B2C CRM and customer service.
• Revenue Streams: Revenue is almost entirely subscription-based, driven by two primary factors:
  1. Contact/Profile Tiering: The monthly subscription fee is scaled based on the number of contacts a business has, ensuring revenue grows predictably with the customer's database.
  2. Usage-Based Services: The platform monetizes the number of SMS messages sent and is integrating AI-driven monetization through new products like the K:AI Customer Agent, which is expected to drive higher Average Revenue Per User (ARPU).
• Key Growth Driver: Klaviyo’s strong relationship with Shopify (NYSE: SHOP), where it is a recommended email solution partner, provides a steady pipeline of high-growth e-commerce entrepreneurs. Its focus on mid-market and enterprise customers (those generating over $50K in ARR) is a major lever for increasing overall revenue and stabilizing growth.

Macroeconomic Impact

Klaviyo’s model is heavily tied to the health of e-commerce and discretionary consumer spending.

• Headwinds: A global slowdown or high inflation can impact its core e-commerce customer base, leading to:
  • Lower Conversion Rates: E-commerce companies may see lower sales, which could reduce their willingness to expand their marketing technology stack.
  • SMS Cost Pressure: Messaging costs (telecom charges) are a significant expense, and managing these while maintaining high gross margins is an ongoing challenge.
• Tailwinds/Resilience:
  • Focus on ROI: In a constrained economy, businesses focus on marketing channels with the highest Return on Investment (ROI). Klaviyo's highly targeted, data-driven communications are proven to be high-ROI, making it a "must-have" tool rather than a discretionary one.
  • First-Party Data Shift: As third-party cookies fade, Klaviyo’s core advantage—its ability to leverage first-party customer data—becomes a significant competitive moat and a major tailwind.
  • AI Adoption: The rapid rollout and adoption of its K:AI products provide a powerful, high-growth hedge against general economic slowdown.

📈 Recent Performance and Corporate Developments

Klaviyo continues to execute strongly as a newly public company, demonstrating robust top-line growth and impressive margin expansion.

Q3 2025 Financial Highlights 💰

The company delivered a significant beat on its Q3 2025 earnings and raised its full-year guidance, reflecting strong operational momentum.

• Total Revenue: $310.9 million, a strong 32% increase year-over-year, beating consensus expectations.
• Non-GAAP Operating Margin: 14%, a substantial increase from the same period last year, indicating excellent efficiency and operating leverage.
• Large Customer Growth: The number of customers generating over $50,000 of ARR grew by 36% year-over-year to 3,563, showcasing successful up-market penetration.
• Net Revenue Retention (NRR): Remained high at 109%, demonstrating that existing customers are expanding their spend on the platform.

Strategic Initiatives and Mergers 🤝

• Mergers & Acquisitions: Klaviyo has not had any significant mergers or acquisitions recently. Its growth has been entirely organic, focused on product innovation.
• AI-First B2C CRM: The company's biggest strategic move is its transition to becoming the "B2C CRM" of choice, powered by its proprietary AI. Recent major product launches include:
  • K:AI Marketing Agent: An autonomous AI teammate that builds complete marketing plans and ready-to-send campaigns.
  • K:AI Customer Agent (K:Service): An AI-powered customer service platform (Customer Hub and Helpdesk) that integrates service directly with marketing and customer data, positioning Klaviyo against broader CRM competitors.
• International and Enterprise Expansion: Klaviyo reported impressive 43% year-over-year revenue growth in EMEA and APAC, proving its model is successfully expanding globally. This, combined with its large customer growth, de-risks its heavy reliance on the initial SMB e-commerce market.

🎯 Path to Profitability and Fair Value

Klaviyo is a high-growth company that has achieved Non-GAAP profitability and Free Cash Flow positivity, prioritizing scalable growth and market share expansion over immediate GAAP profitability.

Path to Profitability

The path to sustained profitability is based on leveraging its existing scale and high gross margin structure:

• Profitability Status: Q3 2025 saw a Non-GAAP Operating Margin of 14% and continued positive Free Cash Flow, demonstrating the financial efficiency of its SaaS model.
• Future Focus: The company's long-term strategy targets a Non-GAAP EBIT margin of 15%–17% by 2028. This will be achieved by:
  • Operating Leverage: As revenue grows faster than operating expenses (excluding R&D, which is critical for AI), profitability will naturally expand.
  • AI Monetization: The high-margin, AI-driven products (K:AI) will increase ARPU and the overall company gross margin (which is already high at 76%).

Price and Analyst Estimates 📊

• Analyst Consensus and Ratings: The consensus rating for Klaviyo is a "Strong Buy" or "Buy." Notably, over the last 30 days, multiple analyst firms have reiterated or upgraded their ratings following the strong Q3 results. A recent review shows 22 Buy ratings and only 1 Hold rating over the last three months, signaling high conviction. The stock also holds a Zacks Rank #2 (Buy).
• Price Targets and Fair Value:
  • The average 12-month price target from analysts is approximately $44.00, with a range extending to a high of $60.00.
  • The stock is currently trading around the $30 range, suggesting a potential upside of over 45% to the average price target. This gap suggests analysts believe the company's valuation is highly attractive relative to its growth and market position, especially given the rapid adoption of its new AI platform.

Investor-Focused Takeaway: Is KVYO Right for Your Portfolio?

Klaviyo offers a unique investment opportunity as a high-growth B2C CRM leader with a strong e-commerce foundation and an accelerating AI strategy. Its model is proven, showing high gross margins, impressive retention, and a clear path to expanding Non-GAAP profitability.

What to Watch in the Near Term: 📈

• B2C CRM Adoption: Monitor the success and revenue contribution of its new K:Service (Helpdesk and Customer Agent) products as Klaviyo expands its TAM beyond core marketing.
• SMS Cost Management: Watch gross margin stability, as the cost of the SMS channel is a key operational pressure point.
• Enterprise Momentum: Continued growth in the $50K+ ARR customer cohort is crucial for revenue stability and validating its up-market strategy.

Recommendation:

Klaviyo (KVYO) is a Strong Buy for investors looking for exposure to the critical intersection of e-commerce, customer data, and AI-powered marketing. The company's exceptional growth rate, high analyst conviction, and current price-to-growth valuation make it a compelling investment, despite the potential short-term volatility associated with its e-commerce customer base.

Final Take: Two SaaS Stocks Converting AI Into Revenue — Not Just Hype

In a crowded field of AI promises, Freshworks (FRSH) and Klaviyo (KVYO) are standing out by actually delivering real productivity, real customer wins, and real profitability.

Whether you’re betting on AI-enhanced customer service for the enterprise or data-driven e-commerce automation at scale, both companies offer distinct business models backed by strong fundamentals and bullish analyst outlooks.

🧠 Freshworks (FRSH) – AI-Driven IT and Customer Experience
✔ Enterprise-ready Freddy AI tools already generating ARR
✔ Non-GAAP profitable with 26.6% free cash flow margin
✔ Device42 and Freshservice for Business Teams expand TAM
➤ Best for: Investors seeking a mid-cap SaaS name with strong AI adoption, operational discipline, and major enterprise upside.

📩 Klaviyo (KVYO) – E-Commerce CRM Powering Personalized Growth
✔ 32% YoY revenue growth with 109% net retention
✔ Strong Shopify pipeline + $50K+ ARR customer growth
✔ AI-powered “K:AI” platform expands from marketing to support
➤ Best for: Growth investors targeting high-margin exposure to e-commerce, CRM, and first-party data strategies.

Investor Insight:

📊 Want AI-enhanced SaaS with profitability and enterprise momentum? → FRSH
​ 🛍️ Want a high-growth CRM platform leading the AI revolution in e-commerce? → KVYO

These two SaaS stocks aren't just building the future of AI in business—they're already getting paid for it.​
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Happy Trading
​— Team Premium Stock Alerts