Duck Creek Technologies, Inc. (DCT - Get Rating) in Boston is a software-as-a-service (SaaS) provider of core systems for the property and casualty (P&C) insurance industry. The company has made several strategic collaborations and expanded its reach. And last September, it announced that it had been recognized as a Leader in the 2021 Gartner “Magic Quadrant for P&C Core Platforms, North America” for the seventh consecutive time.

However, the stock has declined 36.7% in price over the past year and 36.6% over the past three months to close yesterday’s trading session at $28.41. 

DCT’s first-quarter FCF came in at a negative $25.51 million compared to $22.90 million in the year-ago period. Also, its shares plunged to their 52-week low of $26.63 on Jan. 10, 2022, in sync with the broader tech sell-off amid a more hawkish Fed stance. So, its near-term prospects look uncertain.

Here is what could influence DCT’s performance in the near term:

Strategic Collaboration

On January 10, DCT announced that software company Precisely had launched a new integration with Duck Creek Policy, the Precisely CAT Area Underwriting Embargo integration, to give carriers more control in  writing policies in potential natural disaster areas. It partnered with Experian on January 6 to help general insurance providers in the U.K. market enhance their underwriting and claims handling.

Impressive Financials

DCT’s total revenue increased 24.6% year-over-year to $73.42 million for its fiscal first quarter, ended Nov. 30, 2021. The company’s SaaS annual recurring revenue grew 40% year-over-year. Its non-GAAP net income increased 127.9% year-over-year to $4.77 million, while its non-GAAP EPS came in at $0.04, up 100% year-over-year. Also, its adjusted EBITDA increased 114.7% from the last year to $7.79 million.

Poor Profitability

In terms of trailing-12-month EBITDA margin, DCT’s 4.72% is 67.3% lower than the 14.42% industry average. The stock’s negative trailing-12-month levered FCF margin compares with the 11.72% industry average. Also, its trailing-12-month ROCE, ROTC, and ROTA are negative compared to the 8.37%, 4.99%, and 3.62% respective industry averages.

Stretched Valuation

In terms of forward non-GAAP P/E, DCT’s 339.19x is 1,290.6% higher than the 24.39x industry average. The stock’s 4.33x forward non-GAAP PEG is 159.7% higher than the 1.67x industry average. In addition, its 1.81x and 12.85x respective forward EV/S and P/Sare higher than the 4.07x and 3.99x industry averages.

POWR Ratings Do not Indicate Enough Upside

DCT has an overall C rating, which equates to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. DCT has a C grade for Quality, which is in sync with its lower-than-industry profitability ratios.

The stock has a D grade for Value, which is consistent with its higher-than-industry valuation ratios. It has a D grade for Momentum, which is in sync with its 36.6% loss over the past three months and 30.2% decline over the past six months.

DCT is ranked #39 of 167 stocks in the Software – Application industry. Beyond what I have stated above, we have also given the stock grades for Growth, Stability, and Sentiment. Get all the DCT ratings here.

Bottom Line

DCT has carved out a market niche serving the insurance industry, but it faces intense competition from other players in the SaaS space. The stock is currently trading below its 50-day and 200-day moving averages of $29.28 and $39.04, respectively, indicating a downtrend. Also, analysts expect its EPS to decline 33.3% year-over-year to $0.02 for the quarter ending May 31, 2022. So, we think it could be wise to wait for a better entry point in the stock.

How Does Duck Creek Technologies (DCT) Stack Up Against its Peers?

While DCT has an overall POWR Rating of C, one might want to consider investing in A-rated (Strong Buy) Software-Application stocks, such as Open Text Corporation (OTEX - Get Rating), Progress Software Corporation (PRGS - Get Rating), and Commvault Systems, Inc. (CVLT - Get Rating).

Click here to check out our Software Industry Report

DCT shares were unchanged in premarket trading Thursday. Year-to-date, DCT has declined -5.65%, versus a -0.83% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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