By Joshua Brown
Every day there are companies, technologies and people who are changing the way the business world works. The purpose of this column is to expose you to new ideas as a jumping-off point for your own research. Welcome to "The New Disruptors."
On the evening of February 26, a little-known software company serving a moribund industry announced its fifth quarter as a public company and absolutely demolished analysts’ expectations. That company, Guidewire (GWRE), announced they’d beaten the consensus estimate of 2 cents for the fiscal second quarter by a factor of 10 -- announcing a profit of 21 cents per share on revenues of $72 million, a jump of 70% from the same quarter a year prior. (Editor's note: An earlier version incorrectly stated these were Guidewire's first results as a public company. In fact, Guidewire went public in January 2012.)
Guidewire shares jumped 20% the next day into the mid-30’s range, and they have held the gain ever since. (The stock is trading just below $37 early in Monday's session.)
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Guidewire is now the hottest software stock you’ve never heard of, so let’s begin by getting a bit more familiar...
For starters, Guidewire is in the business of providing a core software solution to the property & casualty insurance vertical. The company’s offerings cover all facets of the business -- from selling and underwriting to collection of premium to policy administration to the payment of claims.
Like a traditional SaaS (software as a service) company -- think Salesforce (CRM) -- Guidewire’s products are meant to collect recurring revenue and can be infinitely scaled and deployed around the world. Unlike SaaS, however, this software becomes the center of the enterprise, deployed on the premises and “mission critical” to the user, reducing churn and upping customer loyalty (read: dependence). This is a great model with lots of visibility and the potential for add-on sales where we’ve seen it elsewhere in the software ecosystem. Over the past fiscal year, Guidewire’s recurring revenues have grown at about 28%, with new licensing sales making up 75% or so and the remainder in maintenance fees.
Guidewire is currently serving 130 total customers, 44 of which are using more than one software product of theirs; 22 of these customers are so-called “full suite” in that they’re running almost entirely on Guidewire’s software. Globally, Guidewire works with AXA and Allianz; in the U.S. their customers include GEICO, Sentry and Nationwide.
$3 billion revenue base
The company estimates that property and casualty insurers spend some $20 billion on software annually against a total pie of $1.2 trillion in industry premiums around the world. With 100 or so companies as clients out of a global total of more than 7,000 P&C companies, there is plenty of room for growth should the company be able to continue winning new installs and executing. Guidewire believes that their potential market opportunity could support a recurring revenue base of up to $3 billion a year.
On the heels of the company’s massive beat two weeks ago, the handful of investment banks with coverage quickly upped their estimates and targets. UBS took its target to $40 and dubbed Guidewire “one of our top small cap picks for the year,” noting customers are paying ahead of schedule with 80% of fourth-quarter license revenues already under contract.
Taking a look at the stock, with a $2 billion market cap on an expected $300 million in estimated sales this year, the valuation probably precludes most investors of a value orientation -- it’s already doubled from the IPO price of $13. UBS is now expecting to see 48 cents per share in earnings this year, implying a forward PE of around 80. To maintain a multiple like that, sales growth will have to continue at the breakneck pace we’ve seen thus far during the company’s short history in the spotlight.
Momentum investors will want to keep their ears peeled for future new customer wins and further announcements of the company’s efforts to bulk up their revenue base around the world. With a beta of 2.75, this is the kind of fast-growth stock that tends to get slapped around during a general market sell-off; so if we get something like that this spring, it may open up an opportunity for a new long position.
Please use this column as the beginning of your own research and when playing new, disruptive stocks, keep in mind that heightened risk frequently comes with high potential rewards.
As of this writing, the author has no position in any of the stocks mentioned in this column. This is subject to change in the future. All information presented is believed to be reliable at the time of publishing. Nothing in this article should be construed as advice or a solicitation to trade any securities.
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