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This Software Developer Has a Long Runway for Growth

Rodney Nelson

Rodney Nelson: Over the last several years, Guidewire (GWRE) has emerged as the premier vendor for replacing decades-old legacy software systems in the property and casualty insurance industry. Guidewire's core application suite handles mission-critical policy administration and management operations, creating a significant level of customer switching costs that serve as the foundation of the company's wide economic moat.

Insurance companies have long relied on clunky software systems that lack sophistication and create scalability issues across different business lines and geographies. This ultimately leads to cost slippage by way of overpaid claims and mispriced policies. Guidewire's application suite is written on a unified platform and features advanced claims-analytics capabilities. This eliminates the scalability issues of the past while enabling claims adjusters and policy administrators to make more cost-effective decisions. As a result, Guidewire's software has become the gold standard in this vertical, leading to deals with some of the largest insurers in the world, including Nationwide and State Farm.

Guidewire's runway for growth is long, as penetration stands at less than 20% of global premiums written, and Guidewire has the ability to both cross-sell to additional insurance lines and upsell customers to data-analytics platforms such as Data Hub and the cloud-based application suite Guidewire Live. Although the market is currently pricing in much of our enthusiasm for Guidewire's long-term growth prospects, we would be happy buyers of this stock on a modest pullback below our fair value estimate.