Guidewire Software Stock Up 150%: Rally Is Just Starting

Key Points

• Guidewire outperforms expectations and raises guidance; AI drives business and improves margins. 
• Analysts are raising their targets and guiding the market higher. 
• As robust as the outlook is, consensus estimates are too low, and upward analyst revisions are expected.

Guidewire Software NYSE: GWRE stock price has increased 150% in the last eighteen months because of the utility it provides insurers. The company operates as a B2B cloud-based SaaS that provides a suite of platforms for property and casualty insurers. The suite can be used piecemeal or as an end-to-end solution for group and self-managed plans. 

The benefits of using Guidewire include improved customer experiences but, more importantly, increased automation, enhanced security, and business planning, all of which aid margins. Because the company uses AI to power its operations and provides an embedded analytical tool directly into core workstreams, its margins and the margins of its clients are expected to widen now and over time.  

Client Wins Drive Outlook for Guidewire

As good as the outlook is, numerous recent client wins suggest the guidance is cautious. Among them is Oregon-based United Heritage Insurance. United Healthcare Insurance has been a long-standing client of Guidewire but recently decided to go all-in and migrate its core business to the cloud. The purpose is to improve operations and grow the business, which Guidewire is well-positioned to do. It makes current operations easier, as well as finding and onboarding new ones. 

Another new client is New Zealand insurer FMG. FMG insures New Zealand and decided to simplify IT operations and improve flexibility in a rapidly changing environment. Drivers of the decision include numerous one-off events in 2023 and a desire to remain relevant to its clients. The bottom line is that Guidewire is expanding its client base and deepening the penetration of services, which is a dual tailwind for the business. 

Strong Results Spur Guidewire Analysts to Raise Targets

Guidewire had a solid Q3 and provided better-than-expected guidance, which spurred the analyst to raise targets. Highlights from the report include outperformance on the top and bottom lines, sequential acceleration, YoY acceleration, solid profitability, and a forecast for similar results next fiscal year. As it is, the consensus analyst forecast for 2025 is for an acceleration to 12% annual growth, which is a cautious forecast. 

The analysts' data is good. There are thirteen analysts tracked by MarketBeat, sufficient to assume a moderate conviction level from the sell side. Eleven of them issued a revision this year, and nine following the Q3 results, increasing conviction in the price target. 

The nine updates include nine increased price targets and nine reaffirmed ratings that amount to a Buy/Strong Buy rating. The consensus target implies a 4% downside but is rising and supports the market. The revision trend lifted the consensus by 55% compared to last year and 15% since the Q3 report, leading the market to the range's high end. That ranges between $140 and $170 or 5% to 35% upside. 

Institutional interest is another tailwind for this market. The institutions own about 99% of the stock and have bought on balance this year. The Q1 activity was vigorous on both sides of the trade but increased total ownership, and the buying continued in Q2, aligning with Q1 market consolidation and the rally in Q2. 

Guidewire Could Reach $180 or Higher by Next Year

The technical action in Guidewire is robust. The chart of monthly action shows a correction met by buyers followed by a sharp 100% rally. The rally is highlighted by a Bullish Flag Pattern and continuation signal that broke critical resistance and resulted in a new all-time high. The technical targets derived from this move include a $60 and 100% increase from the breakout point of a move to the range of $180 to $240. The $180 target is above the analysts' high target, but their range is tracking in the right direction. Assuming the Q4 results and updated outlook for 2025 are as expected, the trend in analysts' sentiment should continue, and a move to $180 or higher will follow.