Duck Creek Technologies Stock: Why I Am Ducking Out (NASDAQ:DCT)

Investment thesis

Since I’m not sure Duck Creek Technologies, Inc.’s (NASDAQ:DCT) growth rates can be sustained, I don’t think its P/S ratio should be more than four times greater than the median of the S&P 500. Therefore, given the current valuation, I wouldn’t buy Duck Creek stock.

Introducing Duck Creek

Duck Creek Technologies Inc. is a vendor of core systems for the property and casualty (P&C) insurance business that offers Software as a Service (SaaS).

The company’s expertise in the property and casualty insurance sector has allowed it to create a single, unified suite of insurance software products that supports carriers’ agility by enabling quick integration and expediting the capacity to record, retrieve, and utilize data.

Duck Creek Policy, Duck Creek Billing, and Duck Creek Claims are among the tools in the Duck Creek Suite that serve the P&C insurance industry lifecycle.

Property and casualty insurance (P&C) refers to a wide variety of insurance products. In general, it refers to insurance coverage that safeguards your assets, including your property.

Market Outlook

Consumers are using insurance in new ways, and they have different or additional expectations of their insurers than in the past. When dealing with clients, P&C companies must be prepared to respond with both technology and a comprehensive customer strategy. Customers want more personalized products and services that match their lives.

Rather than focusing just on the insurance products offered, technology and data insight may provide a fantastic opportunity to personalize the user experience. Telematics, mobile applications, self-service, and other technology advancements are enhancing goods, pricing, claims, services, and other aspects of the industry.

All of these variables create opportunities for property and casualty insurers to improve client engagement and business processes. There is a huge opportunity to reduce expenses and risk while increasing connections.

As a result, I expect the P&C software industry will expand at a reasonable pace.

Competition and product review

Insurance companies’ increased investment in software solutions, as well as the introduction of new platforms spanning from core system modernization to new digital engagement and data and analytics solutions, have produced the interest of entrepreneurs and investors. Increased capital allows market participants, or potential future market participants, such as “insurtech” companies, to pursue more aggressive strategies, improve existing services or products, try to introduce new services and products, develop disruptive solutions, and consolidate with other vendors. This business is also influenced by changing technical options, shifting customer needs, and the proliferation of cloud-based solutions. These features, in my opinion, lead to a more competitive climate.

Firms that compete are P&C insurance software firms including Guidewire (NYSE:GWRE), EIS Group, Insurity, Majesco, Prima Solutions, RGI, and Sapiens.

Users rate the product Duck Creek an average of 4.3 / 5 on Capterra and an average of 4.2 / 5 on Gartner.

Dislikes mentioned are:

• Bit of a struggle to navigate

• Sometimes frustrating and slow

• Front end could be upgraded

• Upgrades difficult and time-consuming.

Likes mentioned are:

• The capabilities to build, deploy and maintain insurance products (across all functional areas)

• The Duck Creek platform is capable of satisfying very broad requirement.

Some users have complained about its ease of use, which I believe to be an important characteristic of successful software. However, the product is rated to cover a lot of different functions satisfying a range of requirements.

The ratings of Duck Creek are pretty decent compared to its competitors. For instance, it scores a bit higher than Guidewire and Sapiens. Nonetheless, there are other competitors who score higher than Duck Creek as well.

Overall, I believe that they seem to do okay in the competition.

Financial Performance

Growth rates (Year-over-year):

index	2019	2020	2021	Last 4 quarters
Revenue	7%	23%	22%	18%
Gross Profit	3%	15%	31%	22%

Source: Seeking Alpha

Margins (% of revenue):

index	2019	2020	2021	Last 4 Quarters
Gross Profit	57%	54%	57%	57%
Selling, General & Admin	44%	46%	44%	41%
Research & Development	20%	20%	18%	18%
Net Income	-9%	-14%	-6%	-4%
Free Cash Flow Margin	3%	8%	-4%	0%

Source: Seeking Alpha

Duck Creek has set some excellent revenue and gross profit growth in the last few years. Furthermore, due to operational efficiencies, it saw its profit margin improve to close to 0. According to its latest annual report, most of the revenue growth can be attributed to the increase in subscription revenue from new customers as well as existing customers.

Nonetheless, I have my doubts whether the revenue growth of 18 to 23% can be continued. I believe that the competition is getting increasingly more competitive, while I think its product is decent but nothing extraordinary. Besides, while I do believe that the P&C software market has a decent future growth rate ahead, I don’t think it’s high enough to support a twenty-something % growth rate in the medium or long term for this company.

Valuation and other statistics

Basic valuation and performance-related statistics of Duck Creek and Guidewire:

index	PS Ratio	Gross Margin	Price to Gross Profit	3Y sales growth
Duck Creek	6.52	57%	11.44	21%
Guidewire Software	7.42	45%	16.49	2%

Source: Seeking Alpha

Duck Creek is quite a bit cheaper compared to its close competitor, Guidewire Software, while setting much higher growth rates. Nevertheless, a P/S ratio of 6.52 isn’t cheap, considering that the median P/S ratio of the S&P 500 is 1.54. It has a higher gross margin than the S&P 500 and I do believe that the growth rate will be higher than the median of the S&P 500 (SPY), so I believe that a higher P/S ratio is justified. However, as I am not a 100% convinced that it will sustain its high growth rates, I don’t think the P/S ratio should be more than 4 times higher. As a result, I wouldn’t buy the Duck Creek stock with the current valuation.

Because I do believe that they do offer a reasonable product in an attractive market, and have improved their margins in the last few years, I will take another look if the multiple valuations have decreased.