Guidewire Software Stock Rallied 49% Over Recent Months, Should You Invest?

After a 49% rally since March 23, Guidewire Software’s stock (NYSE: GWRE) looks fully valued based on its historic Price-to-Sales (P/S) multiple. Guidewire Software, which provides a technology platform for Property & Casualty (P&C) insurance carriers, has seen its stock rally from $76 to $113 off the recent bottom compared to the S&P which moved around 40%. The stock is slightly ahead of the overall markets as the company is benefiting from overall positive investor sentiment toward the insurance sector. Further, its stock is up 11% from levels seen at the end of July 2019 (GWRE FY Aug – July).

Guidewire Software’s stock has almost reached the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. This seems to make it fully valued as, in reality, demand and revenues will likely be lower this year than last year.

Some of this rise over the last 2 years is justified by the roughly 41% growth seen in Guidewire Software’s revenues from FY 2017 to FY 2019. Further, it has been able to improve its net income from $18.1 million in 2017 to $20.7 million in 2019. The lower growth in net income figures could be attributed to a higher Cost of Revenues as a % of total revenues – 37.6% in FY 2017 to 47.1% in FY 2019.

While the company has seen steady revenue growth over recent years, its P/S multiple has not seen a significant increase. We believe the stock is unlikely to see a significant upside after the recent rally and the potential weakness from a recession driven by the Covid outbreak. Our dashboard What Factors Drove 57% Change in Guidewire Software Stock between 2017 and now? has the underlying numbers.

Guidewire Software’s P/S multiple changed from about 10.5x in FY 2017 to 11.5x in FY 2019. While the company’s P/S is around 13x now, there is a possible downside when the current P/S is compared to levels seen in the past years – P/S of 11.5x at the end of FY 2019 and 10.5x at the end of FY 2017.

So what’s the likely trigger and timing for further stability?

Guidewire Software provides a technology platform, which includes software, services, and a partner ecosystem, for Property & Casualty (P&C) insurance carriers. The company generated around 54% of its revenues from licenses & subscriptions and 35% from services in 2019. Due to the ongoing Covid-19 crisis and economic uncertainty, businesses have slashed or postponed spending and P&C insurance providers are no exception. This is likely to impact its top line in the near term as service assignments and licenses & subscription fees could suffer. We believe Guidewire Software’s Q4 results in August are likely to see a drop in its revenues on a year-on-year basis.

However, over the coming months, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which helped to set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results. Though market sentiment can be fickle, and evidence of a sustained uptick in new cases could spook investors once again.  

While Guidewire Software’s stock does not present strong upside potential, which S&P 500 component stocks are likely to outperform the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

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