On Monday, Citi updated its financial model for Guidewire (NYSE:GWRE) Software, Inc. (NYSE:GWRE) shares, leading to an increase in the price target to $165 from the previous $123, while maintaining a Neutral rating on the stock. The adjustment comes after Guidewire's fourth-quarter performance, which demonstrated robust bookings execution and improved profitability.
Guidewire secured 16 cloud deals in the quarter, slightly less than the 17 deals a year prior. The company's Annual Recurring Revenue (ARR) surpassed the high-end of its guidance, showing a 14% year-over-year growth on a constant currency basis.
This marks a slight deceleration but is set against a tougher comparison from the previous year. The fully ramped ARR, which indicates the revenue expected once all contracts are fully operational, grew by 19%, showing an acceleration compared to fiscal year 2023.
The firm's outlook for FY25 ARR exceeded consensus expectations, but the standout was Guidewire's profitability. The gross and operating cash flow margins outperformed consensus by 1 and 6 percentage points, respectively. Citi anticipates that Guidewire will reveal updated mid to long-term targets at their analyst day in October, given that their FY25 targets are already tracking ahead of plan.
Despite the positive performance, Citi remains neutral on the stock. This stance is attributed to the stock's significant year-to-date increase of 51% and its valuation, which is at a premium compared to peers in the vertical software market. Specifically, Guidewire's forward-looking valuation based on FY25 enterprise value to free cash flow is 61 times, which is high relative to its peers.
Citi's revised long-term estimates for Guidewire's revenue have increased by 2 percentage points, and gross margins by 1 percentage point. These changes have been reflected in the updated regression analysis, leading to the new price target of $165.
In other recent news, Guidewire has been making significant strides in the market, as evidenced by its recent financial reports. The company reported a 19% year-over-year increase in fully-ramped Annual Recurring Revenue (ARR) during its fiscal fourth-quarter earnings report, according to DA Davidson. The firm also noted a surge in Guidewire's cloud deal closures, with 42 completed in the fiscal year, up from 37 in the previous year.
Guidewire's robust performance led DA Davidson to increase the company's stock price target from $168 to $186, while maintaining a Buy rating. The company's strong cloud sales have been a key driver of this updated target, reflecting Guidewire's successful transition towards cloud offerings.
Furthermore, Guidewire's management has provided fiscal 2025 guidance surpassing DA Davidson's prior forecasts, contributing to the decision to raise the price target.
In addition to its earnings report, Guidewire also provided a promising forecast during its earnings call. The company anticipates hitting the $1 billion ARR milestone in the current fiscal year, driven by its successful cloud platform.
Guidewire also projects becoming GAAP profitable in fiscal year 2025, with total revenue expected to be between $1.135 billion and $1.149 billion. These recent developments highlight Guidewire's strong growth and future potential.
InvestingPro Insights
Following Citi's positive revision of Guidewire Software, Inc. (NYSE:GWRE) price target, InvestingPro data and tips further enrich the investment outlook. Guidewire holds a promising financial position with more cash than debt, indicating a healthy balance sheet. In addition, analysts are optimistic about the company's potential for income growth, with 12 analysts revising their earnings upwards for the upcoming period, signaling confidence in Guidewire's future performance. This aligns with Citi's expectations of updated mid to long-term targets coming in above plan.
InvestingPro data highlights Guidewire's market capitalization at approximately $13.37 billion, illustrating the company's substantial size in the market. Despite the lack of profitability over the last twelve months, the company's revenue has grown by 8.3% in the last twelve months as of Q4 2024, demonstrating an upward trajectory. Moreover, with a high Price/Book ratio of 9.96, the stock is trading at a premium, which is consistent with Citi's valuation concerns.
For investors seeking more comprehensive analysis, there are over 10 additional InvestingPro Tips available, including insights into Guidewire's profitability projections for this year and its trading activity relative to its 52-week high. These tips can provide valuable context for investors considering Citi's updated price target and the stock's current market performance.
Investors can access these tips and more detailed metrics on the InvestingPro platform, which offers an extensive array of tools and analytics to inform investment decisions. For further insights into Guidewire's financial health and market standing, visit https://www.investing.com/pro/GWRE.
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