Is Veeva Systems Stock a Purchase?

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Veeva Systems(NYSE: VEEV) The share price fell 5% after the company’s second quarter earnings report was released on September 1, even as the cloud-based services company beat analyst estimates and raised its forecast for the whole year.

Veeva’s revenue grew 29% year-over-year to $ 455.6 million, beating estimates of $ 4.7 million. Its adjusted net income rose 31% to $ 152.7 million, or $ 0.94 per share, to beat expectations by eight cents.

For the full year, Veeva expects revenue and adjusted profit to increase by 25% and 21%, respectively. It has raised its revenue and profit forecasts for the year as a whole for three consecutive quarters.

Image source: Getty Images.

Veeva’s growth rates look impressive, but the stock’s high valuations may limit its upside potential. Should investors ignore short-term volatility and buy Veeva’s post-earnings decline?

Stable growth in an expanding niche market

Veeva primarily provides cloud-based customer relationship management (CRM), storage and analytics services for life science companies. At the time of its IPO in 2013, Veeva served 170 clients. It ended the second quarter with more than 1,100 clients, including pharmaceutical giants like AstraZeneca, Novartis, and Moderna.

These companies use Veeva’s services to maintain customer relationships, manage their sales teams, store and analyze data, and track clinical trials and industry regulations. Veeva has established a first-mover advantage in this niche market, and it does not face many direct competitors. The growth of the life sciences market, along with intense competition between these leading drug makers, is driving Veeva’s growth and keeping customers locked into its cloud services ecosystem.

That’s why Veeva’s revenue retention rate, which assesses its ability to retain customers and sell additional services, fell from 121% in fiscal 2020 to 124% in fiscal 2021. , which ended in January. This is also why Veeva’s growth has remained so constant in recent years:

Period

2018 financial year

FISCAL 2019

FISCAL 2020

Fiscal year 2021

1H 2022

Income Growth (YOY)

26%

25%

28%

33%

29%

Adjusted EPS growth (YOY)

27%

70%

34%

34%

33%

Source: Veeva. FY = fiscal year. 1H = first half. YOY = year after year.

Veeva expects its revenue to more than double from $ 1.47 billion in fiscal 2021 to $ 3 billion in calendar year 2025, which includes the major part of fiscal year 2026.

Unlike many other high-growth cloud companies, Veeva has remained consistently profitable on both GAAP and non-GAAP metrics since its IPO, for two simple reasons: it has significant pricing power in its niche market, and she doesn’t spend too much money. on stock-based compensation charges, which represented 12% of its revenue in the first half of fiscal 2022.

But does Veeva’s stability justify its premium valuations?

Veeva’s biggest weakness is its valuation. Even after falling after earnings, it is still trading at 88 times this year’s earnings and 26 times this year’s sales. This rating is foamy compared to other cloud-based CRM companies.

Selling power (NYSE: CRM), which powers parts of Veeva’s platform with its cloud-based services, is trading at 60 times this year’s earnings and 10 times this year’s sales. For the full year, Salesforce expects revenue to grow 23% to 24% this year and adjusted profit to increase 40 to 41% (after ruling out a big benefit from an accounting change last year).

Salesforce is much larger than Veeva and growing at a slightly slower rate, but it also plans to more than double its annual revenue to over $ 50 billion by fiscal year 2026. As a result, salesforce investors looking for a cheaper CRM game might prefer to invest in Salesforce rather than Veeva.

Is Veeva’s stock worth buying?

Veeva’s stock is expensive, but I think its dominance in the cloud life sciences market, robust growth rates, impressive financial discipline, and confident long-term revenue goals all justify its premium valuation. Conservative investors might prefer Salesforce to Veeva, but I personally own both stocks, as they will both benefit from the centuries-old growth of CRM platforms and the digitalization of businesses.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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