What happened
Veeva Systems (VEEV -0.45%) dropped 15.2% last month following its quarterly earnings report. While the financial results were mostly positive, the company's outlook disappointed Wall Street. The stock was also impacted by broader market weakness among tech and growth stocks.
So what
Veeva Systems narrowly beat analyst estimates for its third-quarter revenue and adjusted earnings per share. The company reported 16% revenue growth, with balanced expansion coming from both subscriptions and professional services. It produced nearly $150 million in free cash flow during the quarter. Veeva also announced an expanded partnership with Merck (MRK -0.55%) and that it had reached a critical new milestone in the rollout of its new drug safety product.
Image source: Getty Images.
That's all good news, but investors were disappointed by the company's forward-looking guidance. Veeva Systems' projections called for $551 to $553 million in fourth-quarter revenue and just under $200 million in adjusted operating profits. That implies no growth over the third fiscal quarter, and it was below analyst estimates. Growth has been an important part of Veeva's investment narrative, so any threat of a slowdown is likely to spook investors.
Veeva's guidance also implies a significant decline in adjusted operating margin, which would drop from 40% to nearly 36%. This could simply be a conservative forecast that sets reasonable expectations and attainable goals, but there's a looming risk of deteriorating market conditions. Margin compression could signal reduced pricing power, uncontrollable operating expenses, or weakness among target customers.
Now what
Veeva Systems might be experiencing slowing growth, but there's still plenty to like about this company. It has a wide economic moat due to high switching costs. The company's platform is an integral part of operations for most of the largest pharmaceutical and life sciences companies, and it continues to expand those relationships through product suite expansion. That places Veeva in a strong competitive position serving an industry that's expected to outpace global economic growth over the next decade.
Despite having strong long-term fundamentals, the stock is at one of its cheapest points in years. Its forward price-to-earnings ratio is 35, price-to-sales is around 12.5, and enterprise-value-to-earnings before interest, taxes, depreciation, and amortization (EBITDA) is under 44. All of those valuation ratios have been chopped in half from the height of the pandemic bull market. The stock isn't exactly cheap, but it's reasonably priced compared to its expected growth. If it can maintain an elevated growth rate while producing strong cash flows, the current valuation leaves plenty of room for substantial shareholder returns.
