Veeva Is Tumbling: What Gives?

Veeva Systems (VEEV 0.91%) has seen its stock go from a 5% gain this morning to a 9% drop later in the day. This comes on the heels of the company's earnings release, which beat on both earnings and revenue -- and offered upbeat guidance.

So the question is: Why is the company down on the good news, and what should it mean for investors? Read below to find out.

Source: Veeva Systems 

For those who might not be familiar with the company, Veeva was started seven years ago by now-CEO Peter Gassner, who was an executive with salesforce.com (CRM 0.42%). While working for the cloud giant, he realized that many pharmaceutical companies had specific cloud needs that weren't being met by salesforce.

Looking at the company's earnings numbers, there seems to be a lot to like here.

Source: Barron's 

All in all, it looks like a pretty solid quarter, and guidance that would usually make any investor happy. But there's one thing missing from this picture: valuation.

Veeva is a newly minted IPO, with the promise of an enormous and lucrative cloud opportunity with pharmaceutical companies. As a result, investors have been willing to pay top dollar for Veeva shares. Even after today's tumble, shares are still trading for a ridiculously high 151 times earnings, and 212 times free cash flow.

It's highly likely that today's sell-off is the result of this valuation. It's clear that some in the market think shares are simply too high, given that 22% of them are currently being sold short.

But dig in, and there's a lot to like
Personally, when a company is growing and just becoming profitable, and has an opportunity to disrupt major fields, I don't mind buying it when it is expensive by traditional metrics -- which is what I did a little more than a month ago.

The biggest news coming out of the company's conference call was the fact that it had extended its agreements with salesforce all the way into 2025. That's important, because instead of building out its own server network, Veeva has been hosted on salesforce since its inception. Some had worried that this exposed Veeva to undue risk if salesforce decided to change its terms -- and this should assuage those fears.

Furthermore, subscription revenue increased by 89% during the fourth quarter, and represented about 73% of all revenue. This is incredibly important, as it represents a reliable stream of revenue the company can count on.

Finally, over the life of the company, Veeva's CRM platform has provided the lion's share of business. But two new offerings -- Vault and Network -- are starting to supply additional revenue. These offerings also have higher margins than the core CRM business; as they continue to grow, they could certainly juice Veeva's returns.

All in all, for a long-term investor, this was a good quarter. Before going out and buying shares, you should be fully aware that Veeva is still a very expensive stock. I may consider adding more in the near future, but the company will remain far less than 1% of my overall retirement holdings.