Guidewire Software Wins Conviction As Top Pick Courtesy Market Leadership & Cloud Transition, Analyst Says

RBC Capital analyst Rishi Jaluria reiterates Guidewire Software, Inc. GWRE with an Outperform and a $90 price target.

Guidewire delivered a solid overall quarter and prudent outlook, increasing Jaluria's conviction in Guidewire as a top pick to be defensive and leading shares up 1% after market close. 

The cloud momentum and demand commentary were upbeat. The cloud deal momentum, with eight wins in the quarter (vs. four in F1Q23), including two net new customers, three migrations, and three existing customer expansions, which were diversified across regions.

Guidewire maintained ARR guidance which seems conservative in light of strong net new ARR performance in the quarter. The analyst is cautiously optimistic that ARR growth could end up stable (or accelerate) from current levels based on management's upbeat cloud commentary (consistent with his checks), improving execution, and his view that demand could remain resilient in an uneven macro.

The gross margins continue to outperform, primarily Subscription & Support, leading to a raised FY23 profitability outlook and giving increased confidence in the long-term targets. 

The re-rating reflects Guidewire's market leadership, attractive and defensive vertical opportunity, and favorable financial model exiting the cloud transition.

JMP Securities analyst Joe Goodwin reiterates Guidewire with a Market Outperform and a $95 price target.

The analyst remains optimistic about the stock for several reasons. First, it continues to deliver on the metrics that matter. 

Subscription revenue beat expectations in the quarter, and the company raised its FY23 expectations, as it saw improved deal linearity and existing customers extended cloud contracts.

Another critical metric is a non-GAAP subscription which supports gross margins. The subscription and support gross margin in F2Q was 57.4% (JMPe 50.0%), and the company now expects an FY23 subscription gross margin of ~51-52%, an increase from its former outlook of ~49%. 

While this metric did benefit from some one-time cost savings in F2Q, the company sees improvement in the metric from its focus on cloud infrastructure efficiency, better-than-expected subscription revenue performance, and better economics from its new agreement with its cloud provider. 

The end market remains "steady," and the company maintains its leadership position. 

The analyst thinks Guidewire will benefit from the P&C insurance vertical's move to the cloud. 

The company is operating efficiently as it continues to scale toward its $1 billion ARR target without increasing its headcount. 

The analyst thinks the business is well-led by CEO Mike Rosenbaum.

Price Action: GWRE shares traded higher by 4.89% at $75.02 on the last check Tuesday.