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Is Guidewire Stock the Best Insurtech Stock for Investors?

A few months ago, we introduced you to a lesser-known insurance technology stock called CCC Intelligent Solutions (CCCS). While we found CCC to be a “surprisingly interesting company flying under the radar,” we were not overly compelled by the market opportunity due to its heavy reliance on the automotive insurance industry, which may be upended by the coming self-driving revolution. In addition, its recent merger with a special purpose acquisition company (SPAC) in order to access the public markets is an automatic red flag for us. SPACs have notoriously overpromised and underdelivered over the last few years, though CCC appears to be the exception to the rule. It has posted solid revenue growth over the last decade through digitization and the adoption of artificial intelligence.

Click to Guidewire website

However, CCC is not the only decades-old company in the midst of rebranding itself as a software-as-aservice (SaaS) insurtech. We also recently came across Guidewire (GWRE), a Silicon Valley software technology company founded more than 20 years ago. It went public way back in 2012 and had the best IPO debut of the year – the same year that Facebook stumbled out of the gate. While Guidewire stock has not returned +1,400% to shareholders like Meta (née Facebook) has since 2012, it has roughly kept pace with the Nasdaq at about +400%. The company is projecting about $850 million in annual recurring revenue (ARR) in 2024 as it transitions to a cloud-based SaaS platform for property and casualty (P&C) insurance companies. 

The Insurtech Market Opportunity

Before we dive further into Guidewire stock, let’s revisit why we’re even interested in the theme of insurance technology. It’s pretty simple:

Size of the global insurance market
Size of the global insurance market. Credit: Statista

This year the bright minds at Statista predict the insurance market will hit about $6.5 trillion, making it one of the biggest industries in the world. A compound annual growth rate (CAGR) of 9% gets you to more than $8 trillion pretty quickly in 2026. Meanwhile, the big brains at McKinsey and Co. project a run-rate impact of cloud adoption on the insurance sector of between $70 billion and $110 billion by 2030. That puts the insurance industry among the top five sectors to be disrupted by cloud computing technologies.

Cloud technologies will impact the insurance industry more than most other industries.
Cloud technologies will impact the insurance industry more than most other industries. Credit: McKinsey and Co.

The added value comes from what McKinsey calls rejuvenation and innovation. The former focuses on ways cloud technologies can lower costs and risks across core operations. The latter is about all the cool whiz-bang cloud-based applications that companies can leverage thanks to big data, IoT sensors, and AI algorithms. 

What Does Guidewire Do?

That brings us back to Guidewire, which develops software products to help insurers manage their core business processes, such as policy administration, billing, and claims management. The platform combines “core operations, digital engagement, analytics, machine learning, and AI applications delivered as a cloud service or self-managed software.” Its platform products include InsuranceSuite Cloud, InsuranceNow, and InsuranceSuite. Guidewire is considered the leader in its market for providing insurers with the software they use to operate their businesses.

Gartner pegs Guidewire as the market leader for providing core platform software solutions to the insurance industry.
Gartner pegs Guidewire as the market leader for providing core platform software solutions to the insurance industry. Credit: Gartner

As the name implies, Guidewire InsuranceSuite Cloud is the company’s flagship cloud-based platform that customers can customize according to their needs. It has three core applications for end-to-end policy administration (PolicyCenter Cloud), underwriting (BillingCenterCloud), and claims management (ClaimCenter Cloud). That’s the rejuvenation part of the McKinsey analysis. On the innovation side, Guidewire offers products like Guidewire Predict, which is a machine-learning platform that helps insurers leverage data to better manage claims or boost profits by improving pricing accuracy. Another product, HazardHub, uses geospatial data to help P&C companies understand property risks. 

Screenshot of Guidewire webpage.
Analytics is one of the big selling points of the company’s cloud-based platform for insurers. Credit: Guidewire

InsuranceSuite represents the old-school, on-premises software solution where customers license and manage the three core applications separately or together. InsuranceNow is a cloud-based P&C platform targeted to small- and mid-sized companies that offers an all-in-one policy, billing, and claims management capability, plus a few other pre-loaded applications around functionalities such as analytics.  

Guidewire Stock Financial Picture

Now that we understand something about the business, let’s break down some of the numbers from Guidewire. The company offers two different financial pictures. We can look at total revenues during the fiscal year or ARR, which better reflects the growth of its cloud-based SaaS solution. Here’s a two-year snapshot of quarterly revenues based on Guidewire’s three primary revenue streams:

Guidewire revenues for the last eight quarters.
Credit: Guidewire

First thing you might notice is that there is some seesaw action quarter by quarter. In other words, there is no consistent sequential growth quarter after quarter. The company claims this is because its business is seasonal. The biggest bump is almost always in the fourth quarter “due to efforts by our sales team to achieve annual incentives.” So, the sales reps are sitting on their hands until they feel the pressure to hit their quotas. This sort of quarterly noise is why we generally only check in with a company once per year.

A snapshot of the company's North American customer base for one of its core applications, PolicyCenter Cloud.
A snapshot of the company’s North American customer base for one of its core applications, PolicyCenter Cloud. Credit: Celent

Unfortunately, we don’t have a nice and neat chart for ARR, which encompasses both cloud-based software and on-premises software. For example, Guidewire finished 2023 with $763 million in ARR, up 15% from the previous year. Drilling a little deeper: Total Cloud ARR, which includes all cloud products and customers that have contracted to move to the cloud, grew 28% year-over-year and comprised 59% of total ARR. And deeper still: Subscription revenues, which represent the Guidewire InsuranceSuite Cloud, was up 36% to $352 million. That’s up more than 10-fold in five years when subscription revenue was just over $30 million. 

Insuring Future Revenue Growth

The financial picture continues to look pretty rosy into the near-term. In 2024, Guidewire projects an ARR of between $846 million and $858 million, representing about 12% growth at the midpoint. Subscription revenues will remain on the same growth trajectory at about 34%. Total gross margins should clock in at about 60%. That number should continue to go up as low-margin professional services revenue, mostly related to software licenses, becomes less important as more customers migrate to the cloud where support costs are baked into the subscription fee.

By 2025, Guidewire management is guiding to an ARR growth rate of about 16% to 17%. Let’s be conservative and call it 15% CAGR through 2030. Using the midpoint ARR for 2024 of $852 million, the company could expect to have more than $3.3 billion in annual recurring revenue by the end of the decade. Based on the earlier McKinsey report of a total addressable market of between $70 billion and $110 billion for cloud insurtech services, Guidewire will still only have captured between about 5% and 3% of the market. So, if we believe all the math, Guidewire has plenty of room to run in the long term.

Should You Buy Guidewire Stock?

Guidewire stock is looking pretty good so far. The company ended its most recent year with more than $900 million in cash and other liquid assets against about $397 million in debt. While still not profitable, the company cut its annual net losses by nearly 40% to about $111 million. There seems to be little chance it will need to take on more debt or dump more shares into the market. In fact, Guidewire has been doing just the opposite: In September 2022, the company’s board of directors authorized the repurchase of up to $400 million in shares. They won’t be purchasing shares at rock bottom prices though, as Guidewire stock is up by 50% over the last year, about double the performance of the tech-heavy Nasdaq.

Guidewire stock performance.
Guidewire stock has doubled returns for investors compared to the Nasdaq since it announced a $400 million stock buy back program. Credit: Yahoo Finance

Guidewire stock still only sports a simple valuation ratio (market cap of $7.5 billion/annualized revenues of $1.08 billion) of 7, which isn’t that far away from our Nanalyze Disruptive Tech Portfolio average of 5. On a first pass, it appears to be a more complete package compared to a company like CCC Intelligent Solutions that focuses on just one corner of the P&C market. Guidewire counts 13 of the top 15 global insurers as customers that use its software as part of their core business platform, and all but one are now using some cloud-based applications. It also closed 37 new cloud deals last year, including three in Europe and two in Asia-Pacific. The company claims more than 540 customers in 40 countries with 37% of revenues coming from outside the United States.

Moving forward, we would like to see common SaaS metrics like gross retention rate and net retention rate to see what percentage of customers are sticking around and how much more money are they spending per year on the platform. But one thing is pretty clear: Guidewire is successfully pivoting to a cloud-based SaaS business.

Conclusion

We have not had much success in finding an insurtech stock that we like, let alone love. We are actively avoiding companies like Lemonade and Root, which are direct-to-consumer insurers. Both are now trading well below our $1 billion market cap threshold. Root, in particular, is hovering around $150 million after being valued at $6.7 billion at its IPO. Contrast that against Guidewire, which was valued at about $635 million when it went public in 2012 and now stands at $7.5 billion. That’s the difference between a business-to-business SaaS firm providing global customers with core platform software versus insurance apps marketed to Robinhood types.