Guidewire Software Has 5% Downside

Goldman Sachs started coverage of Guidewire Software Inc GWRE with a Neutral rating and $57 price target.

The brokerage remains on the sidelines on valuation despite being confident about the company's ability to gain share for multiple years as it's benefitting from a multi-decade replacement cycle within the P&C insurance industry.

"We believe GWRE will be able to leverage a technology and ecosystem advantage to sustain an 18%/19% license CAGR through FY18E/FY20E. However, in-line with the vertical software multiple expansion theme at 6.9X/33X EV/CY18E sales and FCF, versus our coverage average of 4.8X/30.4X, we view GWRE as fairly valued," analyst Jesse Hulsing wrote in a note.

The analyst estimates customer penetration to grow from 26 percent in FY16 (260 customers) to 32 percent in FY18 (320 customers).

Further, Hulsing expects license revenue from Tier 1 customer to grow at a 19 percent CAGR through FY18 versus 21 percent in the FY14-FY16 period. Tier 1 accounts are estimated to account 40 percent of license revenue in FY16.

"[C]ross-sell and up-sell within the segment become more key to sustaining our mid-high teens license growth," Helsing continued.

The analyst anticipates improving gross margins and sales efficiency should boost operating margins to 21 percent by FY18.

Shares of Guidewire closed Monday's session at $60.27.