Guidewire Software (NYSE:GWRE) is a large SaaS provider to the P&C insurance industry. Boasting a customer base of 570 insurance businesses in more than 40 countries around the world, Guidewire’s platform touches every aspect of insurance from billing to claims management.
Shares of GWRE have performed extremely well in the past year, rising by more than 43 percent. Is Guidewire Software a stock to buy now, or have shares become too pricey to attract investors in today’s market?
45 Quarters of Positive YoY Growth
Long before the surge in AI technology that’s powering its rising share prices, Guidewire established a strong pattern of consistent revenue growth. In the past 10 years, the business has only reported five quarters of negative year-over-year revenue growth.
Of particular note is the fact that the growth rate has increased recently, with each of the last three quarters seeing revenue growth of more than 19 percent compared to their respective year-ago periods.
As a software provider, Guidewire also enjoys the annuity-like benefits of recurring subscription revenues. As of the end of its fiscal Q3 on April 30th, Guidewire reported ARR of $960 million, up from $864 million in fiscal Q1. By the end of fiscal 2025, management expects its ARR to rise to just over $1 billion.
Guidewire’s track record of revenue growth hasn’t, however, translated over to equally smooth earnings growth thanks to a string of net losses over at the turn of the decade from which it is only now emerging. In fiscal Q3, Guidewire managed to generate a net income of $46.0 million against a loss of $5.5 million in the year-ago quarter. On a non-GAAP basis, though, Guidewire has shined with Q3’s non-GAAP net income coming in at $75.2 million, or EPS of $0.88.
Beyond standard bottom line figures, other profitability metrics look less shiny. Over the last 12 months, for instance, the business has produced a return on equity of just 2.7 percent and a return on invested capital of only 1.8 percent.
What Now For Guidewire?
Among the largest opportunities for Guidewire going forward is its deployment of AI tools to help insurers increase their efficiency in underwriting and claims management. As a large SaaS and cloud services provider to the insurance industry, Guidewire is in a strong position to bring cutting-edge tech to both the insurers it already serves and new customers it acquires going forward.
As an example of how AI could benefit Guidewire’s business going forward, its latest release, dubbed Niseko, features an AI coding assistant that customers can use to integrate Guidewire’s software into their own operations. The release also features advanced data models that can help insurers more accurately assess risks and automate essential functions.
Even so, the ongoing growth Guidewire is generating may not put sufficient upward pressure on earnings. In the trailing 12-month period, the business has reported GAAP earnings of just $0.40 per share in spite of its strong revenue growth over that time. Though earnings are improving, the historic mismatch between Guidewire’s revenue growth and its profitability may present concerns for investors.
Can Guidewire Justify Its Valuation?
One of the first things an investor is likely to notice when looking at GWRE is the stock’s massive valuation multiples. Right now, Guidewire is trading at 528.6 times trailing 12-month earnings, 15.8 times sales, 77.6 times operating cash flow and 13.1 times book value. While high valuations are somewhat par for the course when it comes to software businesses looking to enhance large industries with AI technology, these lofty multiples could understandably worry value investors.
Somewhat surprisingly, the average analyst price target of $243.87 still implies an upside of over 18 percent in GWRE shares over the coming 12 months. It’s worth noting, however, that the current range of analyst price forecasts is very broad, running from a low of $155 to a high of $290.
Analysts are also somewhat divided when it comes to rating Guidewire. While the stock has a consensus buy rating, 5 analysts rate it as a buy and 3 rate it as a hold. As of now, though, GWRE only has a single sell rating.
Is Guidewire Software Stock a Buy Now?
As a business, Guidewire has several positive characteristics. With a combination of technological innovation and an established presence as a major P&C software provider, Guidewire could be set to continue its long and largely uninterrupted trend of revenue growth. Of particular benefit to the business will likely be the ongoing expansion of its ARR. Guidewire even has the added benefit of offering exposure to the insurance industry without the direct risks associated with rising costs and regulatory challenges that many insurers are facing.
The central problem for Guidewire right now, though, seems to be the price of the stock itself. While Guidewire is both profitable and operating what could be an attractive long-term business, the stock looks quite expensive for a business that’s still generating single-digit net margins, ROEs and ROICs.
In order to justify its triple-digit valuation, Guidewire would have to deliver consistently strong earnings growth over long periods of time. So far, the business has struggled to improve its GAAP margins and generate steadily higher earnings in spite of its good track record when it comes to revenue expansion.
Guidewire does have exposure to markets in Asia and South America. The complex web of regulatory requirements worldwide translate to potential integration delays and higher-than-expected costs that threaten GWRE’s bottom line. Paired with its rather high valuation, delays set GWRE up for a selloff.
As of now, Guidewire Software is likely a better hold than a buy. All in all, valuation offers pause for thought and perhaps a further pullback presents the best opportunity to snap up shares.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.