This Time Tomorrow – GWRE Edition

by Dan May 28, 2013 12:03 pm • Commentary

Welcome to our inaugural “This Time Tomorrow” post, named after the Kinks song by then same name.  If you have never heard it, listen below, a classic.  The purpose of the post will be to highlight what we deem to be a catalyst for a single stock or on the macro front.

In our first edition, I want to highlight a stock called Guidewire Software (GWRE) that was first brought to my attention back in March by my Fast Money friend Josh Brown in his Yahoo Finance post titled, “The Hottest Software Stock You’ve Never Heard Of“, as part of his “New Disruptors”.  What caught my eye about this application software company from Josh’s article:

on February 26,….GWRE announced they’d beaten the consensus estimate of 2 cents for the fiscal second quarter by a factor of 10 — announcing a profit of 21 cents per share on revenues of $72 million, a jump of 70% from the same quarter a year prior.

-Guidewire shares jumped 20% the next day into the mid-30’s range, and they have held the gain ever since.

Chart Now showing Feb Gap:

GWRE 1 yr chart from Bloomberg

GWRE 1 yr chart from Bloomberg

IN an effort not to reinvent the wheel, I am going to paraphrase some of  Josh’s description and his analysis of the company below:

Guidewire is in the business of providing a core software solution to the property & casualty insurance vertical. The company’s offerings cover all facets of the business — from selling and underwriting to collection of premium to policy administration to the payment of claims.

Like a traditional SaaS (software as a service) company — think Salesforce (CRM) — Guidewire’s products are meant to collect recurring revenue and can be infinitely scaled and deployed around the world.

 This is a great model with lots of visibility and the potential for add-on sales where we’ve seen it elsewhere in the software ecosystem.

Over the past fiscal year, Guidewire’s recurring revenues have grown at about 28%, with new licensing sales making up 75% or so and the remainder in maintenance fees.

Taking a look at the stock, with a $2 billion market cap on an expected $300 million in estimated sales this year, the valuation probably precludes most investors of a value orientation

Enough about Josh, and back to yours truly… this is not a company that I have done a lot of work on, so I can’t claim to be any sort of expert, but as a trader it is important to be cognizant of the next thingy, and given Josh’s prior focus, I thought I’d give GWRE a little pre-event treatment.

Event:  GWRE reports fiscal Q3 earnings tonight after the close.  The options market is implying about a 7% move following the results, which is a tad shy of the 4 qtr avg of ~8.35% and the ~9.5% move avg since the company’s first earnings report as a public company back in September 2011.

Sentiment / Ownership / Option Open Interest:

  • Despite having scant coverage by Wall Street analysts, they remain fairly mixed on the stock with 4 Buys, 2 Holds and 1 Sell with an avg 12 month price target of ~$42.
  • Short interest on the stock sits near all time highs at almost 5.5% of the shares outstanding, with the top 10 holders owning close to 50% of the shares outstanding.
  • Options trade by appointment in the stock as total open interest sits at a tad over 5k contracts, most of which trading today.  Earlier today a 3 way trade went up electronically, and if the strcutre went up as it appears, it looks like a trader was protecting a long stock position…from what I can tell, and they are opening, the trader sold ~97o fo the July 45 calls at 1.00 to buy ~970 of the June 40 Puts for 1.65 and Sell ~970 of the June 35 puts at .35.  If that was in fact the trade, the buyer of the package paying .35 would have protection on 97,000 shares of stock btwn now and June expiration btwn 39.65 and 35 with upside potential btwn now and July expiration btwn 40.35 and 45.

SO what will we know this time tomorrow?  Was a trader protecting a long position, and if so, for good reason? Normally in a fairly new public software company with an eye popping valuation a path to profitability is important, but they already have earnings (even-though they don’t appear to be growing), but as Josh mentioned, the total addressable market and the 20% expected sales growth for the next couple years are what growth PMs will be foccussed on, plus the amount of those sales that are recurring.

I have no opinion on the name but stocks with small Wall Street followings, high concentration of long holders, and high valuations can be a dangerous cocktail if and when the newbie hits the eventual earnings roadblock.

My Sense is to wait for tomorrow when I have a bit more information and then make a judgement if the recent strong performance is aided by another solid quarter and guidance confirming GWRE’s status as the “Hottest Software Company” we just hear about.


The Kinks – This Time Tomorrow