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Stock Analyst Update

Mixed Results for Guidewire, but Our Thesis Stands

The wide-moat firm still has a runway for growth.


 Guidewire (GWRE) reported a mixed fourth quarter and end to its fiscal 2018. After rolling our model, we are raising our fair value estimate to $107 per share, from $105 previously, while maintaining our wide economic moat rating. Revenue for the quarter and next fiscal year were in line with our expectations, but Guidewire's margin guidance was on the lighter side. However, we firmly believe our long-term thesis around Guidewire remains intact. Guidewire's growing presence at the top of the market, the expanding number of customers using its nascent cloud platform, and upsell opportunities give us confidence that the firm still has a runway for growth. Guidewire's offerings in the P&C niche are largely unparalleled, with the firm being protected by adamantine switching costs. These factors give us confidence in our modest fair value increase, and with shares once again trading at a discount to our fair value estimate, we see this as an attractive entry point for this name.

Guidewire reported $661 million in revenue and the firm now has 380 total customers (up from 328 last year), aided by 15 new customer wins in the quarter. Color from the conference call indicated that the vast majority of these wins were in Europe, where the firm has been strategically focusing on penetrating the fickle European P&C insurance market. European customers have historically bought from regional software vendors and look to partner with vendors with referenceable customers in similar geographies. Thus, we believe Guidewire's traction in Europe today will lead to easier incremental wins ahead. Our valuation thesis remains very simple, while Tier 1 P&C insurer penetration remains robust, as the firm had 28 of the 70 Tier 1 Insurers, wallet share remains much lower. Tier 1 insurers write more than $5 billion in direct written premiums, representing the largest market opportunity, but oftentimes Guidewire sells only one or two products to these customers.

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William Fitzsimmons does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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