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

With a price-to-sales (or "P/S") ratio of 13.8x Guidewire Software, Inc. (NYSE:GWRE) may be sending very bearish signals at the moment, given that almost half of all the Software companies in the United States have P/S ratios under 5.3x and even P/S lower than 2x are not unusual. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Guidewire Software

What Does Guidewire Software's P/S Mean For Shareholders?

Recent times haven't been great for Guidewire Software as its revenue has been rising slower than most other companies. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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.

Retrospectively, the last year delivered a decent 13% gain to the company's revenues. The latest three year period has also seen an excellent 40% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 15% per annum over the next three years. With the industry predicted to deliver 21% growth per year, the company is positioned for a weaker revenue result.

In light of this, it's alarming that Guidewire Software's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Guidewire Software's P/S

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

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. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 1 warning sign for Guidewire Software that we have uncovered.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.