Over the past six months, Guidewire Software’s stock price fell to $143.50. Shareholders have lost 8.5% of their capital, which is disappointing considering the S&P 500 has climbed by 7.7%. This may have investors wondering how to approach the situation.

Following the pullback, is now a good time to buy GWRE? Find out in our full research report, it’s free.

Why Are We Positive on GWRE?

With its systems powering the operations of hundreds of insurance brands across 42 countries, Guidewire Software (NYSE: GWRE) provides a technology platform that helps property and casualty insurance companies manage their core operations, digital engagement, and analytics.

1. Billings Surge, Boosting Cash On Hand

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Guidewire Software’s billings punched in at $364.3 million in Q1, and over the last four quarters, its year-on-year growth averaged 20.6%. This performance was impressive, indicating robust customer demand. The high level of cash collected from customers also enhances liquidity and provides a solid foundation for future investments and growth.

2. Customer Acquisition Costs Are Recovered in Record Time

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Guidewire Software is extremely efficient at acquiring new customers, and its CAC payback period checked in at 6 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a highly differentiated product offering and a strong brand reputation. These dynamics give Guidewire Software more resources to pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments.

3. Operating Margin Reveals a Well-Run Organization

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This metric shows how much revenue remains after accounting for all core expenses — everything from the cost of goods sold to sales and R&D.

Guidewire Software has been an efficient company over the last year. It was one of the more profitable businesses in the software sector, boasting an average operating margin of 8.2%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Final Judgment

These are just a few reasons Guidewire Software is a high-quality business worth owning. With the recent decline, the stock trades at 7.8× forward price-to-sales (or $143.50 per share). Is now a good time to initiate a position? See for yourself in our in-depth research report, it’s free.

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