A Major Confidence Boost for this Health Care IT Provider

Veeva Systems overcame two major hurdles in the most recent quarter. Is it time for smooth sailing?

Mar 20, 2014 at 6:30PM

Veeva Systems (NYSE:VEEV) is a provider of cloud-based IT solutions tailored specifically for the life sciences. Their "industry cloud", as they call it, allows customers in the health care space to operate more efficiently by putting everything from customer relationship management (with VeevaCRM) to clinical trial design, data analysis, and regulatory filings (with VeevaVault) online. These offerings follow the growing trend of interconnectedness that penetrates modern business, with a specific eye on the unique regulatory and compliance issues that make health care operations difficult and expensive.

VEEV Chart

VEEV data by YCharts

Excitement over Veeva's prospect sent the stock soaring after its October IPO. The stock then pulled back over several months on a series of bearish arguments. Some recent news should relieve those concerns, though, allowing Veeva and it's stock to continue to grow unabated.

Bearish worries
There were two main arguments floating around the web suggesting that Veeva's growth potential was limited, leading to the conclusion that its exorbitant 100 forward P/E ratio is unsustainable. The first argument relates to the total addressable market for Veeva's products. With 33 of the pharmaceutical industry's top 50 companies as customers, one has to wonder if the market is already near saturation. As Fool Leo Sun pointed out, the addressable market for CRM solutions has declined as biotech and pharma layoffs decrease the number of sales reps in the field.

That market could shrink even smaller as larger firms, like Roche's (NASDAQOTH:RHHBY) Genentech, adopt in-house cloud solutions. In January, Veeva announced that its relationship with Genentech had expired. That disclosure raised concerns that the bigger life sciences players may choose to build their own CRM solutions on salesforce's PaaS platform, bypassing middleman Veeva. For a company as geographically widespread and logistically complicated as Roche (and other big pharma companies), it would make sense to develop its own IT solutions to meet its unique needs.

The other worry, and it is certainly a big one, relates to Veeva's reliance on cloud-computing powerhouse Salesforce.com (NYSE:CRM). VeevaCRM, the product which enables seamless exchange of data and marketing materials between sales reps and management, is based on Salesforce's platform. In exchange for use of the platform and industry exclusivity, Salesforce received a guaranteed minimum cut of VeevaCRM revenue for the duration of the 5 year Value Added Reseller Agreement. It's natural to wonder, then, if Salesforce could use its leverage to squeeze Veeva for a bigger cut when the agreement expires next year.

Renewed confidence
Veeva's most recent quarterly report relieved the weight of some of those concerns. First and foremost, Veeva announced an extension of its arrangement with Salesforce.com through 2025. According to Veeva founder and CEO Peter Gassner, the renewed agreement shouldn't change the status quo, stabilizing gross margins on VeevaCRM revenue for 10 years.

That deal is also a smart one for Salesforce. Salesforce now has guaranteed access to growth in the life sciences IT market with very little operating cost. And for customers like Roche, who are choosing to build private solutions, Salesforce's standard offerings provide a platform for in-house custom CRM design.

The other concern regarding the total addressable market and a fear of competition requires a deeper look at the numbers. The key stat to look for in a growing subscription based company is retained revenue. For fiscal 2014, Veeva retained 166% of its subscription revenue from existing customers at the start of the year. How can you retain more than you had in the first place? Simple -- just sell more to existing customers. Veeva is finding success in growing its addressable market by offering more services, in the form of Veeva Vault and Network, to create an ecosystem of management solutions for its users. And because existing customers are spending more, Veeva is recognizing higher margin revenues with lower acquisition costs, bringing its gross margin up to 75.3% from 74.3% a year ago (with an even bigger improvement in non-GAAP gross margins).

Foolish bottom line
Updates to Veeva's agreement with Salesforce and impressive retained revenue statistics should relieve some worries about the company's operations. While the business is primed for success, investors should still be wary of the price tag, as a 5-year PEG of 4.77 suggests that much of that growth is built in. If you find Veeva interesting, look to benefit from some short-term volatility to build a long term position.

Healthcare IT isn't the only place to find hyper-growth stocks
It's difficult to find stocks with excellent growth prospects at good prices -- in fact, many have said it can't be done. But David Gardner has proved them wrong time, and time, and time again with stock returns like 926%, 2,239%, and 4,371%. In fact, just recently one of his favorite stocks became a 100-bagger. And he's ready to do it again. You can uncover his scientific approach to crushing the market and his carefully chosen six picks for ultimate growth instantly, because he's making this premium report free for you today. Click here now for access.

Seth Robey owns shares of Veeva Systems. The Motley Fool recommends Salesforce.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers