$14.00
$58.00
bear $14.00
base $40.00
bull $58.00
margin of safety $24.00
market price* $168.86
Guidewire sells the core software that property and casualty insurers use to run policy administration, claims and billing. Customers are large insurers who rarely swap these systems, and the company is in the middle of shifting from term licences (revenue booked mostly up front) to cloud subscriptions (revenue booked evenly over the contract). That shift depressed cash earnings for several years and is now visibly finishing. How we measure earnings. We start from operating cash flow, strip out swings in receivables, deferred revenue and other working capital, then deduct stock-based compensation as a real cost (about $182 million in fiscal 2026, 12% of revenue) and a maintenance share of capital spending. On that basis owner earnings per share were roughly zero to negative from fiscal 2020 through fiscal 2024 (a low of about -$2.22 in fiscal 2022 during the cloud transition), then $1.45 in fiscal 2025 and $2.19 in fiscal 2026 ($187 million). The fiscal 2025 figure is flattered by a $54 million non-cash charge on retiring convertible notes that is added back in operating cash flow; without it, it would be about $0.83. Because the older years describe a business still mid-transition, we treat fiscal 2026 ($2.19) as the earnings level the business has already reached, rather than averaging in the transition years. Last year owner earnings per share grew about 51% (far more excluding the note charge); our first-year assumption in the base case is 6%, well below that, so we are not assuming the recent surge repeats. What is credited as growth. Annual recurring revenue, the annualized value of signed subscription, support and term-licence contracts, ended fiscal 2026 at $1,237 million, up 19%, and contracted revenue not yet recognized was about $4.3 billion. Because ARR grew through the year, the exit rate is meaningfully above the year's average, so recurring revenue in fiscal 2027 is largely already contracted. We credit modest growth of 6% tapering to 2% over ten years on that basis. We do not credit further market share gains, new products, or further margin improvement, although subscription gross margin did rise from 68% to 73% in fiscal 2026. Base case, about $40 per share. Owner earnings start at $2.19 and grow 6%, 6%, 5%, 5%, 4%, 4%, 3%, 3%, 2%, 2%, reaching about $3.24 in year ten. After that we assume gradual attrition of 3% a year as contracts eventually roll off or are replaced, which is conservative for systems this deeply embedded but is the amount of persistence we can evidence. Everything is discounted at 6%. Debt is not deducted, since the earnings stream is already after interest. Bear case, about $14 per share. Guidewire itself discloses that a relatively small number of large insurers account for a substantial part of revenue and ARR and have significant negotiating leverage. In the bear case that leverage and cloud hosting and services costs hold owner earnings near $1.40 (about a third below fiscal 2026) with no growth, declining 6% a year after year ten. It also assumes the $690 million of 1.25% convertible notes due November 2029 must be refinanced at roughly market rates, costing about $0.38 per share of earnings a year thereafter. Bull case, about $58 per share. The company's own record is executed: ARR keeps growing at double-digit rates for several years (growth of 12%, 12%, 10%, 10%, 8%, 8%, 6%, 5%, 4%, 3%) as subscription gross margin keeps improving, reaching about $4.62 in year ten, with only 2% annual attrition afterward. What we tested. The value depends heavily on the recent jump in cash earnings holding. The cash flow statement shows that jump came from higher subscription revenue and lower net working-capital drag, not from one-off items in fiscal 2026 (the one-off note charge affected fiscal 2025). Stock-based compensation has risen every year and is a permanent drag we have already deducted. Buying back about $606 million of shares in fiscal 2026 shows management confidence but is not counted in the value. Diluted share count of 85.4 million is a weighted average; the year-end count after buybacks is somewhat lower, which would modestly raise per-share values. What would make this wrong: a large customer moving to a competitor or renegotiating price hard, cloud costs rising faster than subscription revenue, or stock compensation outgrowing revenue. The margin-of-safety price of $24 sits well below the base case because the earnings history is short on the current business model and the bear case is well under half of base.