Over the past six months, Guidewire has been a great trade. While the S&P 500 was flat, the stock price has climbed by 36.2% to $237.45 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Guidewire, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Is Guidewire Not Exciting?
We’re happy investors have made money, but we don't have much confidence in Guidewire. Here are two reasons why GWRE doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last three years, Guidewire grew its sales at a 12.6% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the software sector, which enjoys a number of secular tailwinds. 
2. Low Gross Margin Reveals Weak Structural Profitability
For software companies like Guidewire, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.
Guidewire’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 61.9% gross margin over the last year. Said differently, Guidewire had to pay a chunky $38.13 to its service providers for every $100 in revenue. 
Final Judgment
Guidewire isn’t a terrible business, but it isn’t one of our picks. With its shares outperforming the market lately, the stock trades at 15.6× forward price-to-sales (or $237.45 per share). At this valuation, there’s a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d suggest looking at the most dominant software business in the world.
Stocks We Would Buy Instead of Guidewire
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