How the 36% 2024 Rally Shapes Guidewire’s Outlook After Latest Earnings Surge

Thinking about Guidewire Software’s stock and wondering if it is a buy, sell, or hold right now? You are not alone. Guidewire has been a standout performer this year, climbing 35.7% year-to-date and an impressive 263.6% over the last three years. Even in the past month, it managed to eke out a 4.9% gain, despite a very slight dip of 0.2% in the last week. These kinds of long-term returns can catch any investor’s attention and often spark big questions about what is actually driving the move and whether current prices are justified.

So what is shaking the market’s perception of risk and reward for Guidewire lately? Beyond general sector optimism and momentum in software stocks, the company has benefited from ongoing digital transformation across the insurance industry. Guidewire’s cloud-based platforms are at the center of this shift, attracting customers as insurers modernize how they do business. As more firms upgrade their systems, Guidewire is often front and center, which has contributed to its sustained stock price growth and a sense of optimism among investors.

But just because a stock has run up does not always mean it is undervalued. If you look at the numbers, Guidewire’s current valuation score is zero out of six; that is, it does not come through as undervalued on any of the most common checks analysts use. Still, there is much more to the story than a single score can reveal. Let’s dig into the different ways people try to value Guidewire, while keeping an eye out for an approach that might shine an even brighter light on its true worth.

Guidewire Software scores just 0/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: Guidewire Software Discounted Cash Flow (DCF) Analysis

The Discounted Cash Flow (DCF) model estimates a company's fair value by projecting its future cash flows and then discounting them back to their value today. This approach aims to measure what Guidewire Software’s business is truly worth, based on the cash it is expected to generate in years to come.

Currently, Guidewire Software reports Free Cash Flow of approximately $278.9 Million. Analysts provide cash flow projections for up to five years, with Simply Wall St continuing extrapolations beyond that period. The forecasted Free Cash Flow for 2028 is $528.99 Million, with longer-term estimates climbing up to $941.0 Million by 2035. These projections assume steady growth as Guidewire continues to serve a digitizing insurance industry.

After discounting all future cash flows to today’s dollars, the model assigns Guidewire Software an intrinsic value of $140.85 per share. Compared with its recent price, this means the stock is about 63.3% overvalued according to this DCF calculation.

Result: OVERVALUED

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Guidewire Software.

Our Discounted Cash Flow (DCF) analysis suggests Guidewire Software may be overvalued by 63.3%. Find undervalued stocks or create your own screener to find better value opportunities.

Approach 2: Guidewire Software Price vs Sales (P/S) Analysis

The Price-to-Sales (P/S) ratio is a popular way to value software companies, especially those that are profitable but may reinvest heavily or have modest earnings for now. This is because revenue is generally more stable and less prone to swings from accounting choices compared to net income, making it a more reliable anchor for fast-growing tech firms like Guidewire.

A company’s P/S ratio is influenced by how fast it is growing and the risks it faces. Higher growth prospects and lower risk can justify a higher P/S, while more risk or lower growth push the fair ratio down. Investors often compare this ratio to peers and the overall software industry for context.

Guidewire Software currently trades at a P/S of 16.17x, which is significantly higher than the software industry average of 5.29x and the peer average of 9.73x. However, Simply Wall St’s proprietary Fair Ratio model, which incorporates Guidewire’s specific growth outlook, risks, profit margins, industry context, and market cap, suggests a fair P/S of 7.05x for the stock. Because the Fair Ratio takes into account factors that broad peer or industry averages miss, it offers a more personalized valuation benchmark.

Since Guidewire’s actual P/S is well above its Fair Ratio, this suggests the stock is currently overvalued by this measure.

Result: OVERVALUED

PS ratios tell one story, but what if the real opportunity lies elsewhere? Discover companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Guidewire Software Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let’s introduce you to Narratives. A Narrative is a simple, practical way to combine your view on a company’s story, such as technological leadership or industry trends, with the actual financial forecasts you believe in, like future revenue, profits, or margins, to arrive at your own fair value for the stock.

Rather than just looking at numbers in isolation, Narratives connect the big ideas and drivers behind a business to a forecast, and show how your outlook leads to a buy, sell, or hold decision. On Simply Wall St’s Community page, millions of investors are already using Narratives to express their perspectives easily, updating them as new news or earnings come in so they always stay relevant.

By comparing the fair value in your Narrative to Guidewire’s current price, you get a tailored signal for when it might be time to act. For example, in the case of Guidewire Software, some investors currently see an upside potential with a Narrative fair value of $290.00, while others see caution ahead with a fair value as low as $155.00, reflecting very different expectations for revenue growth, profitability, and risk.

Do you think there's more to the story for Guidewire Software? Create your own Narrative to let the Community know!

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.

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