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Investment Thesis

I believe that CCC Intelligent (NYSE:CCCS) has many competitive strengths. Nonetheless, in my opinion, CCC is not yet profitable, and neither the historical nor my anticipated growth rates are high enough to support its more than five times higher PS ratio than the S&P 500 median. That’s why I set the recommendation for this stock to “hold”.

Introducing CCC Intelligent

CCC Intelligent Solutions, founded in 1980, is a property and casualty (P&C) insurance software as a service (SAAS) platform provider. Its position in the P&C insurance market is founded on the vehicle insurance industry, hence its domination lies, in the biggest insurance sector in the U.S. Nevertheless, the company attempts to cover the whole P&C economy.

Property and casualty (P&C) insurers are businesses that provide coverage for assets (such as a home or automobile) as well as liability insurance for accidents, injuries, and damage to other people or their property.

CCC Intelligent Solutions provides solutions to insurers, automakers, collision repairers, parts suppliers, lenders, and fleet operators. Its SaaS platform links trading partners, supports commerce, and supports mission-critical, artificial intelligence-enabled digital workflows.

On July 30, 2021, the current company “CCC Intelligent Solutions” was formed as a result of a business combination transaction between CCC and Dragoneer (a special purpose acquisition company formed by Dragoneer Investment Group). In 2021, the combined company “CCC Intelligent Solutions” was listed on the New York Stock Exchange.

Market Outlook

Consumers of insurance have more personalized and higher expectations of their experience related to insurance than in the past. As a result, P&C companies need to use customer experience tools and data insights to improve such personalized customer strategies. Technology plays an essential role in supporting these changes.

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 available, technology and data insight may provide an excellent chance to customize the customer experience. Telematics, mobile applications, self-service, and other technological improvements are improving the industry’s goods, pricing, claims, services, and other elements.

Moreover, the overall complexity of insurance has increased over time.

All of these factors present possibilities for property and casualty insurers to increase customer engagement and business operations. There is a big opportunity to save costs and risk while expanding connections.

Due to these trends, I believe that the P&C software industry offers a great opportunity.

Competition

The industry for P&C insurance economy software is competitive and fragmented. This market is prone to altering client requirements, changing technology, and the development of new and innovative software solutions.

• Software created in-house: Its major customers have the IT resources to maintain and upgrade their unique internal systems, as well as invest in new technology capabilities. These in-house technological efforts are frequently sponsored by large-scale consulting organizations.

• P&C insurance software suppliers: A variety of providers, comprising core systems providers, underwriting data and software providers, and claims software providers, provide software solutions especially tailored to satisfy the demands of the P&C insurance market. Some of these providers have supporting ecosystems that allow third-party integration to facilitate engagement with the underlying P&C insurance sector.

• Other ecosystem software suppliers: Other established vendors and startups provide software that addresses particular needs in the P&C insurance industry, such as collision repair facility software systems and parts e-commerce platforms.

According to its latest annual report, in 2021, its national carrier customers included 18 of the top 20 automotive insurers, with an average customer relationship spanning more than 10 years. Its national carrier customers also represent 16 of the top 20 overall P&C insurers in the U.S. These statistics indicate a strong leadership position, especially in the P&C insurance business related to the automotive sector.

Competitive Strengths

CCC runs a multi-tenant cloud platform to satisfy the needs of its users. The latest annual report claims that the platform enables them to respond quickly to changing market trends and client demands by innovating and deploying new solutions. They consistently improve existing products and provide new ones to the market, releasing around 1,700 software releases in 2021.

Furthermore, I believe that their huge customer base and expertise, built since 1980, give them a reputation as a trusted provider.

Moreover, the latest annual report claims that CCC’s platform has handled more than $1 trillion in historical data, allowing them to provide unique analytics and insights by using its extensive proprietary data assets. By merging event-specific criteria, local geographic factors, and historical data, its platform allows clients to make the best decisions possible. Company database systems and associated rules engines may be created and adjusted in real-time in response to company requirements and market developments.

Users rate the services of CCC an average of 4.7 out of 5 on G2. Compared to other software platforms that I have reviewed in the past, I believe that this is an extremely high rating.

Overall, I believe that the company owns relevant unique competitive assets and its products are rated well.

Financial Performance

Growth rates (Year-over-year):

Index

2019

2020

2021

Last 4 Quarters

Revenue

8%

2%

8%

13%

Gross Profit

9%

8%

16%

19%

Source: Seeking Alpha

Margins (% of revenue):

Index

2019

2020

2021

Last 4 Quarters

Gross Profit

63%

67%

71%

72%

Selling, General & Admin

26%

26%

57%

57%

Research & Development

18%

17%

24%

23%

Net Income

-34%

-2%

-36%

-32%

Free Cash Flow Margin

7%

11%

12%

12%

Source: Seeking Alpha

According to its latest annual report, the revenue growth rate can be mainly attributed to the revenue growth of existing customers, confirming its strong customer relationships. Furthermore, new customers were acquired as well. The company claims that the gross profit (margin) has increased due to economies of scale.

Another notable change is the significant increase in SG&A and R&D expenses. According to the latest annual report, this is a result of “stock-based compensation, mainly from a vesting term modification of outstanding stock options completed in conjunction with the Business Combination”. Hence, I think it’s more realistic to look at the margins prior to the business combination. In 2020, the net income margin was close to zero percent.

Since CCC already has captured the largest customers in the P&C insurance market related to the automotive sector, I don’t expect the future growth rate to be extremely high. Furthermore, it’s not clear yet how successful the company will be in other sectors. However, due to increased revenue from its strong customer relationships and a strong product, I do expect a consistent reasonable revenue growth rate of between 5 to 9 percent.

Valuation and Other Performance Statistics

I compared several valuations and performance-related statistics to two other listed P&C insurance software providers, Guidewire (GWRE) and Duck Creek (DCT):

Index

PS Ratio

Gross Margin

Price to Gross Profit

3Y Sales Growth

CCC Intelligent Software

7.88

72%

10.94

7%

Guidewire Software

7.42

45%

16.49

2%

Duck Creek

6.52

57%

11.44

21%

Source: Seeking Alpha

First of all, CCC is cheaper than both companies compared. Compared to Duck Creek, CCC is a bit more expensive using the price to gross profit valuation multiple. However, Duck Creek has a much higher sales growth rate. Furthermore, a PS ratio of 7.88 isn’t cheap, considering that the median PS ratio of the S&P 500 is 1.54. CCC has a higher gross margin than the S&P 500, so I believe that a higher PS ratio is justified. However, CCC is not a profitable company yet and both the historical and my expected growth rates are not high enough to justify its more than 5 times higher PS ratio than the S&P 500 median.

As a result, I set the recommendation for CCC’s stock at “hold.”

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