After climbing 53% from its 2024 lows, Clearwater Analyses (Communications Wide Area Network (CWAN)) is poised for another rally. Artificial intelligence and a massive unified database are driving Clearwater stock’s earnings growth.
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Based in Boise, Idaho, Clearwater develops software-as-a-service solutions for insurance companies, banks and other institutions. Two of its most popular platforms, Clearwater Prism and Clearwater Jump, are designed to provide clients with investment accounting, performance, compliance and risk reporting.
Major competitors include BlackRock (BLK), SS&C Technologies (SSNC) And State Street (STT).
The main differentiator?
Clearwater is the only company that offers a “cloud-native solution to its target markets, while other software vendors are still leveraging legacy platforms developed many years ago,” DA Davidson’s Peter Heckmann said in a recent note to clients. He is the brokerage’s managing director of equity research.
Heckmann maintained a buy rating on Clearwater stock, with a price target of 27. The stock is trading around 23.40.
Second-quarter results boost Clearwater stock
Clearwater reported better-than-expected second-quarter results on July 31. The company’s adjusted earnings of 10 cents per share rose 25% from the year-ago period. It was the sixth consecutive quarter in which earnings rose at least 25% on a per-share basis. IBD MarketSurge DataClearwater has a three-year earnings per share growth rate of 52%.
Meanwhile, revenue rose 19% to $106.8 million, down slightly from the previous quarter’s 21% growth rate. It was also just below the company’s three-year sales growth rate of 21%.
This constant growth in profits translates into an optimal result of 99 EPS ratingThe rating evaluates a company’s quarterly and annual earnings growth performance, with greater emphasis on recent results, particularly the past three years of annual earnings and the most recent two quarters.
In response, Clearwater shares soared more than 20% on August 1, hitting a 52-week high.
“We continue to be very excited by the receptiveness of customers and prospects to the new products we develop, often in partnership with our customers,” Sandeep Sahai, Clearwater’s chief executive officer, said in the company’s press release. Second Quarter Press Release.
Sahai continued: “These co-development efforts improve customer satisfaction, drive revenue growth and make our innovation more focused.”
These initiatives seem to be paying off, as the company boasts a 99% gross revenue retention rate. In other words, customers remain loyal to Clearwater.
Finally, the company’s third-quarter guidance came in slightly above analysts’ expectations, with revenue expected to rise 20% to $114 million at the midpoint. And for the full year, management raised its sales guidance by $3 million at the midpoint. Clearwater now expects sales growth of more than 20% this year.
Clearwater’s Growth Drivers
Over the past seven years, Clearwater has experienced tremendous growth, with assets under management on the platform increasing from $1.9 trillion in 2016 to $7.3 trillion in 2023.
Analysts expect a number of positive catalysts to capitalize on the company’s current growth and boost future prospects.
International expansion is expected to be a key part of the company’s growth strategy. In the last quarter, Clearwater highlighted a number of new international clients, including Austria-based Erste Asset Management and M&G Investments, a global investment manager based in the United Kingdom.
In 2023, Clearwater generated 18% of its total revenue outside the United States, an increase from 5% of turnover outside North America in 2020.
Meanwhile, William Blair analyst Dylan Becker said in a client note that the company remains well positioned to capitalize on the early-stage digitization opportunity in investment accounting. Clearwater has a growing portfolio of solutions and an expanding network effect tied to its unified database.
In fact, as more customers use Clearwater, the data set becomes more comprehensive, providing more value to everyone. Becker has an Outperform rating on Clearwater stock.
Analysts expect Clearwater’s earnings to rise 31% to 43 cents a share in 2024. They forecast an 18% increase in 2025, according to FactSet estimates.
Clearwater AI Catalysts
In July 2023, The company launched Clearwater GPTwhich brings the many benefits of AI to its product line.
The company said this will allow its customers to access their data through interactive prompts, which will deliver “insightful, accurate and personalized” AI-generated content.
At the same time, Clearwater has benefited greatly from using AI to increase efficiency. In the most recent quarter, Clearwater posted a gross margin of 72%, surpassing the 70% gross margin in Q2 2023.
In the latest conference call, Sahai said AI has had a bigger impact on Clearwater’s efficiency than on its revenue. But that’s not stopping Clearwater from investing heavily in AI.
“We continue to push AI beyond improving productivity by building and testing applications that guide investment professionals toward best practices for portfolio integration and accounting setup,” Sahai told Investor’s Business Daily.
Keeping customers informed
Sahai continued: “Specifically, we are deploying digital specialists who can track financial trends and stay abreast of global market events and regulations, ensuring our clients are always kept in the loop.
“By analyzing our data network, Clearwater’s digital specialists can generate insights, such as popular accounting elections and their potential impact, that help our clients make the most informed decisions. We are extremely excited about the future of generative AI and Clearwater’s role in staying at the forefront of this cutting-edge technology,” said Sahai.
But AI can only be effective if the models have access to data. Fortunately, Clearwater has a wealth of data, with more than 2,800 data sources.
According to Brian Schwartz, senior analyst at Oppenheimer, Clearwater’s market leadership comes from “its ability to create a comprehensive, master investment accounting record in a dashboard with an easy-to-use interface across all data sources.”
“We are able to use our unique, multi-tenant platform to answer business questions and spot trends in over $7 trillion of investment data that is reconciled daily, providing relevant insights to investment professionals across our global community,” said Sahai.
Clearwater Stock Breaks Above Buy Point
On August 1, Clearwater shares rose above the 21.89 mark. buy points in a base that goes back to November 2023, with a rally of 20%, by IBD MarketSurge Chart AnalysisSince then, shares have held near that 52-week high and remain above that buy threshold.
Bullishly, the relative strength line Clearwater stock has also jumped close to its previous highs. This is an important technical indicator to watch and indicates that Clearwater stock has strong outperformance versus the broader market. Remember, the RS line measures a stock’s price performance relative to the S&P 500.
Finally, with a top-notch 99 IBD Composite Ratingwhich is designed to help identify the best growth stocks, Clearwater stock is clearly a market leader to watch.
Follow Scott Lehtonen on X at @IBD_SLehtonen for top stocks to watch and Dow Jones Industrial Average action.
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