DA Davidson analyst Peter Heckmann issued a downgrade for Guidewire Software (NYSE:GWRE) from Buy to Neutral and maintained the $226 price forecast.

The analyst writes that following the stock's strong performance over the past two years, valuation now appears more extended, leading him to see a more balanced risk/reward profile.

The analyst expects the company to meet or slightly surpass his estimates when it reports third-quarter results (expected to be in early June).

For the third quarter, the analyst estimates revenue growth of 19% year-over-year to $287 million, slightly above the consensus estimate of $286 million.

Also Read: Guidewire Doubles Down On Japan, Plans $60 Million Investment to Meet Cloud Demand

This growth is expected to be driven primarily by a 35% year-over-year increase in subscription revenue, reaching $162 million on the continued shift of customers to cloud-based deployments, adds the analyst.

Heckmann estimates adjusted operating income to grow 92% year-over-year to $40 million, in line with consensus, with operating margins expanding by 530 basis points to 13.9%.

Moreover, the analyst expects the company to end the third quarter with approximately $1.22 billion in cash and investments and $670 million in debt ($690 million at face value).

In particular, the analyst anticipates the company will use cash to repay the remaining $179 million of its 2025 convertible notes at maturity in March, including any additional amount related to the share price exceeding the initial conversion price.

Additionally, Heckmann anticipates management to reaffirm or make minor adjustments to their fiscal 2025 guidance.

The analyst estimates 2027 total revenue of $1.64 billion and adjusted EBITDA of $434 million.

GWRE Price Action: Guidewire shares are down 0.90% at $208.83 at publication on Thursday.

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