Guidewire Software, Inc.'s (NYSE:GWRE) Business Is Trailing The Industry But Its Shares Aren't

Guidewire Software, Inc.'s (NYSE:GWRE) price-to-sales (or "P/S") ratio of 7.4x might make it look like a strong sell right now compared to the Software industry in the United States, where around half of the companies have P/S ratios below 4.2x and even P/S below 1.9x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

See our latest analysis for Guidewire Software

What Does Guidewire Software's Recent Performance Look Like?

There hasn't been much to differentiate Guidewire Software's and the industry's revenue growth lately. Perhaps the market is expecting future revenue performance to improve, justifying the currently elevated P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Guidewire Software will help you uncover what's on the horizon.

How Is Guidewire Software's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Guidewire Software's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 14% last year. The latest three year period has also seen a 24% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Turning to the outlook, the next three years should generate growth of 11% each year as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 13% per year, which is noticeably more attractive.

With this information, we find it concerning that Guidewire Software is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've concluded that Guidewire Software currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 2 warning signs for Guidewire Software that we have uncovered.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.