Mind the GAAP – Guidewire (GWRE)

by Dan September 6, 2017 1:36 pm • Trade Ideas

Tonight after the close, enterprise cloud software vendor for the insurance industry, Guidewire (GWRE) will report their fiscal Q4 results. The options market is implying about a 5% move in either direction, which is basically in line with the average one day post earnings move since the company went public in 2012.

The stock was initially a rocket ship after its IPO where it offered 10.18 million shares at $13 in Jan 2012, with the company being almost immediately opportunistic, selling another 9.2 million shares at $28.25 in a secondary offering in April of 2012 and then another 7.76 million shares at $48.75 in October of 2013.


What’s interesting about that last offering price is that was four and half years ago, and the 52 week low came on December 30th at $49.18 just 1% above the last secondary. Prior to the stock’s breakout to new all time highs this past May, it was in a very long consolidation, spending much of its time since late 2014 between $50 and $60:


One reason for the consolidation might be the erratic sales growth over the years, with only slightly positive GAAP eps:


So why the breakout in 2017 and run away gains, with the stock up 52%? Maybe a reacceleration in revenue growth or a generally apathetic view towards high valuations among investors who are much more inclined to side with growth over value? But with the stock trading at about 75x expected adjusted eps next year, and 9x expected sales, the stock sporting a $5.5 billion market cap (despite having no debt and a decent $500 million cash cushion from the secondaries) might be a tough pill to swallow for potential acquirers.

For a stock with a $5.5 billion market cap, options open interest is fairly pathetic, there is only a total of 1410 with a nearly insignificant notional value. They trade by appointment so to speak. Looking at the Sept options chain below you can see that with the stock just below $75 the bid-ask on the Sept 75 puts is 50 cents, 1.95 at 2.50, which I suspect you would need to pay 2.30 to buy those, while the Sept 70 puts are 50 cents at $1, which I suspect you would have to pay 85 cents to buy them, or sell them at 70 cents:

The point here is simple, just because options are listed in a name, does not mean that they make sense to trade. If you wanted to buy the Sept 75/70 put spread I suspect you would need to pay $1.60, a little more than a third of the $5 wide spread which is slightly in the money. That’s, not a great risk reward given the binary nature of a short dated earnings play.