Guidewire Software, Inc. (GWRE) is a leading provider of core system software to the global P&C insurance industry. The firm provides a suite of software named Guide InsuranceSuite, which includes Guidewire PolicyCenter, Guidewire ClaimCenter and Guidewire BillingCenter. The company's customers are global, national nd regional insurance carriers.
That being what it is, Guidewire is a relatively small player, which generated $232 million of revenue in fiscal 2012. The firm went public in January of last year.
In terms of the competitive environment, Guidewire competes with internally developed software, IT services firms such as Accenture (ACN) and Tata Consultancy Services Limited, P&C insurance software vendors, and horizontal software vendors such as Oracle Corporation (ORCL) and SAP AG (SAP). In other words, Guidewire faces stiff competition from companies with substantially greater scale.
Besides being at a competitive disadvantage, the firm's major shareholders listed on its annual filling are U.S. Venture Partners and Bay Partners, which owned 31.4% of the outstanding common stock. Further, the executive officers and directors, and entities that are affiliated with them, owned 41.5% of the outstanding common stock. Thus, a large portion of over 70% of the outstanding common stock will be looking for opportunities to sell their shares.
So, Guidewire is a company that is at a competitive disadvantage with shareholders looking to sell shares and its common stock is overvalued in the market. Consequently, Guidewire is a short sales candidate.
I believe that shares of Guidewire are being boosted by extraordinarily expansionary monetary policy. Once the Fed starts to taper and shrink its balance sheet, shares of Guidewire should decline substantially in value. Trading at about 10 times sales, we could see between a 30% decline and a 90% decline.
Risks To Outlook
- The company could grow into its multiple without a substantial decline of the share price.
- The multiple could expand and/or the share price could continue to rise.
- The shares may not be available to short sell, and there could be challenges maintaining a short position.
Analysis of Consolidated
With a company trading at the multiples of Guidewire, you would expect substantial amounts of growth. That isn't the case. Between fiscal 2010 and fiscal 2012, revenue grew 60 percent. But revenue growth is slowing.
This fiscal year revenue could grow less than 20%. Generally, the company grows revenue at about 20%. At the same time, there isn't much operating income or net income for investors. The 12 trailing months operating income is $6 million and net income is $7 million.
Guidewire is spending about $60 million on research and development, which isn't going to be enough to compete with Oracle, SAP AG, Accenture and the insurance firms it would like to have as customers.
Also, Guidewire is going to continue to raise equity capital at a cost of equity that is higher than its return on equity. Thus, the firm is destroying shareholder wealth.
Next, current deferred revenues have been generally flat, and non-current deferred revenues are trending lower, which suggest business is not booming. To be fair, accounts receivable are trending higher. But the quality of earnings is low.
Thus, analysis of the consolidated operations suggest being bearish on this stock.
Guidewire is trading at 10.2 times sales, 12.3 times book, 101.0 times cash flow and 110.9 times forward earnings.
Assuming sales double over the next 4 or 5 years, this stock would be trading at a pricey 5 times sales. Thus, where is the upside? In a tighter money environment, there isn't any.
Thus, Guidewire is a stock I can sell short and sleep well at night.