Guidewire Software’s GWRE shares have proven resilient with a year-to-date gain of 17.2% against the Internet-Software industry’s decline of 0.8%. It also has outperformed the S&P 500 composite and the Computer and Technology sector’s decline of 4% and 7.9%, respectively.
Price Performance
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GWRE gained 3.1% in the last session and closed trading at $197.45. The stock is trading at 10% down from its 52-week high of $219.59. Does this pullback present a buying opportunity?
Let us dive into GWRE’s pros & cons and determine the best course of action for your portfolio.
Guidewire Cloud Remains a Key Growth Catalyst
Accelerating the uptake of Guidewire Cloud is a major tailwind. The company is experiencing increasing demand for its cloud platform as insurers transit from legacy systems to cloud-based solutions. It has strategically built out its cloud ecosystem, now consisting of 26,000 Guidewire-focused practitioners across 38 system integrators.
In the second quarter of fiscal 2025, Guidewire won 12 deals. Out of these deals, four were for InsuranceSuite Cloud, one InsuranceNow deal and the remainder were for one or two core X Center applications.
The company's focus on enhancing Guidewire Cloud platform with new capabilities, including digital frameworks, automation, tooling and other cloud services, is expected to boost sales of subscription-based solutions in the long haul.
Guidewire provided a robust outlook driven by strong revenue performance in the fiscal second quarter. It now expects total revenues for fiscal 2025 to be between $1.164 billion and $1.174 billion compared with the earlier guidance of $1.155- $1.167 billion. Subscription revenues are now forecasted to be $653 million, while subscription and support revenues are expected to be $718 million. Services revenues are anticipated to be $210 million. Cash flow from operations is now anticipated to be in the range of $230-$260 million (earlier range: $220-$250 million).
It now expects annual recurring revenues (“ARR”) for fiscal 2025 to be in the range of $1-$1.01 billion (previous projection: $995-$1,005 million). As of Jan. 31, ARR was $918.1 million, up 6.3% year over year.
GWRE’s Improving Profitability
Management’s efforts to drive cloud operations efficiency to boost cloud margins remain an additional tailwind. In the fiscal second quarter, non-GAAP gross margin expanded to 65.2% from 62.7% on a year-over-year basis. The subscription and support segment’s gross margin increased to 69.2% from 65.1% on a year-over-year basis, attributed to higher-than-expected revenues and improvements in cloud infrastructure platform efficiency.
Services’ non-GAAP gross margin was 6.3% compared with negative 11.2% in the year-ago quarter. For the third quarter of fiscal 2025, non-GAAP operating income is estimated in the range of $36-$42 million, while for the fiscal year, the figure is estimated to be between $175 million and $185 million (previous projection: $164-$176 million).
GWRE’s Strong Liquidity Position
Guidewire generated $86 million in operating cash flow in the second quarter of fiscal 2025, surpassing expectations. Free cash flow was nearly $82.2 million. The company’s ability to generate positive cash flow while continuing to invest in growth initiatives provides a solid foundation for future expansion.
Guidewire also has a strong balance sheet. As of Jan. 31, 2025, cash and cash equivalents and short-term investments were $1,412.4 million with $672.8 million of long-term debt. The solid liquidity position indicated that the company made investments in the right direction and the excess cash would be used for pursuing strategic acquisitions, investing in growth initiatives and carrying out distribution to its shareholders.
Challenges Lie Ahead for GWRE
Guidewire’s transition from a term license-based to a cloud-based model will negatively impact the top line in the short haul. Service revenues are getting affected as the company invests more in its ecosystem of implementation partners.
Higher costs remain a concern for Guidewire, especially amid weakness prevailing over global macroeconomic conditions. In the fiscal second quarter, total operating expenses increased 8.1% year over year to $167.4 million. Increasing costs can put downward pressure on the company’s profitability.
Guidewire is witnessing an increasing global footprint, with new customers primarily coming from diverse markets such as Brazil, Belgium and other international regions. While the company is expanding geographically, currency exchange rate fluctuations present a risk to its financial performance. Strengthening the U.S. dollar could further exacerbate these challenges.
GWRE’s Stretched Valuation
The GWRE stock is trading at a premium with a forward 12-month Price/Sales of 13.05X compared with the industry’s 5.08X.
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Mixed Estimate Revision Activity
In the past 60 days, analysts have revised upward estimates for the current quarter whereas the same for the current year has been revised downwards.
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How to Strategize Investment for the GWRE Stock?
Strong financial performance, strategic initiatives in technology and robust market demand make Guidewire an attractive investment opportunity.
However, with a Zacks Rank #3 (Hold), GWRE appears to be treading in the middle of the road and new investors could be better off if they trade with caution. The stock is also trading at a premium valuation and investors could wait for a better entry point to capitalize on its long-term fundamentals. Consequently, it might not be prudent to bet on the stock at the moment.
Stocks to Consider
Some better-ranked stocks worth consideration with the same industry space are Digital Turbine, Inc. APPS, Freshworks Inc. FRSH and Five9, Inc. FIVN. While APPS sports a Zacks Rank #1 (Strong Buy), FRSH and FIVN presently have a Zacks Rank #2 (Buy) each. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for APPS’ fiscal 2025 EPS is pegged at 30 cents, which remained unchanged in the past seven days. APPS’ earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 281.7%. Its shares have risen 47.8% in the past year.
The Zacks Consensus Estimate for FRSH’s 2025 earnings is pegged at 53 cents per share. FRSH’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 33.96%.
The Zacks Consensus Estimate for FIVN’s 2025 EPS is pegged at $2.61, unchanged in the past seven days. Five9’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, with the average surprise being 18.55%.
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