Over the past 12 months, the S&P 500 rallied 25% and the NASDAQ climbed 33%. Those gains -- which propelled both indexes to record highs -- are impressive, but a few other stocks crushed even those returns with triple-digit gains.
Three such stocks -- Veeva Systems (VEEV -0.03%), Paycom Software (PAYC -1.73%), and Proofpoint (PFPT) -- all develop cloud-based software. Let's take a look at why these three cloud stocks surged, and whether investors should consider buying them this year.
Veeva Systems provides a cloud-based CRM (customer relationship management) platform for healthcare companies. It uses Salesforce's SFA (Sales Force Automation) tools as the foundation of its CRM platform for drug companies. Its core products include the Veeva Vault, which tracks prescribing habits, clinical trials, regulatory filings, and industry regulations; and the Veeva Commercial Cloud, which helps companies manage customer relationships.
Shares of Veeva have soared more than 110% over the past year, fueled by four straight quarters of 30%+ annual sales growth and rising profitability. Veeva's revenue rose 34% annually to $142.8 million last quarter, and its non-GAAP earnings surged 83% to $0.22 per share. GAAP earnings more than doubled to $0.15 per share.
Veeva attributes all that growth to the growth of new cloud services and new companies signing up for its Commercial Cloud. Intense competition between drugmakers and new regulatory pressures have also sparked fierce demand for Veeva's industry-tracking services. For fiscal 2017 (which ended on Jan. 31), Veeva expects its revenue and non-GAAP earnings to respectively grow 32% and 79%. For fiscal 2018, analysts expect Veeva's revenue to rise 21%, and for its earnings to grow another 18%.
Paycom Software provides cloud-based tools for payroll processing and human resources. It runs five main businesses -- Talent Acquisition tools for streamlining the recruiting process, Time and Labor Management tools for managing employee work schedules, Payroll tools for automated payments, Talent Management tools for monitoring performance and setting employee goals, and HR Management tools for organizing virtual documents.
Paycom stock has surged more than 110% over the past 12 months. Its revenue growth rate has remained well above 30% ever since its IPO in 2014, and its profitability has gradually improved. Last quarter, its revenue rose 35% annually to $87.8 million, and its non-GAAP earnings grew 80% to $0.18 per share. Its GAAP earnings rose 67% to $0.15 per share, and its adjusted EBITDA nearly doubled to $20.7 million.
Paycom attributed that growth to its higher brand visibility, expansion into new cities, new client wins, and market share gains. For fiscal 2017 (which started on Jan. 1), Paycom expects its revenue to rise 29% and for its adjusted EBITDA to grow about 20%.
Proofpoint is a cloud-based security-as-a-service provider that serves medium and large enterprises around the world. Its platform includes a suite of threat protection, incident response, regulator compliance, email archiving, electronic discovery, and secure communication tools.
Shares of Proofpoint more than doubled over the past 12 months, thanks to its robust earnings growth and improving non-GAAP profitability. Its revenue has risen more than 40% annually over the past three quarters -- which CEO Gary Steele attributed to "robust demand for advanced threat solutions, high competitive win rates, traction with new products, robust add-on activity, and consistently high renewal rates."
Like many of its cybersecurity peers, Proofpoint has great top line numbers but wobbly bottom line ones. Revenue rose 43% annually to $106.8 million last quarter, and billings grew 42% to $138.4 million; but GAAP net loss only narrowed slightly from $27.4 million in the year-ago quarter to $22.9 million. But on a non-GAAP basis, it reported a net profit of $8.5 million, compared to a loss of $0.4 million a year ago.
Proofpoint faces fierce competition from rival cloud security players like FireEye and bigger bundled players like Cisco, but it remains confident in its growth prospects. For fiscal 2017 (which started on Jan. 1), it expects revenue to grow 30% and non-GAAP earnings to improve 36%.
But mind those valuations
Veeva, Paycom, and Proofpoint all boast impressive revenue growth, but their valuations have also been inflated by their year-long rallies. Veeva trades at nearly 100 times earnings and Paycom has a P/E of 77 -- which are both much higher than the industry average of 54 for application software companies.
Proofpoint has a negative P/E due to its uneven profitability, but it trades at 90 times forward earnings and 10 times sales -- which is double the industry average P/S ratio of 5 for software companies. Therefore, investors interested in these three hot stocks should do some more homework to see if their future growth potential can be justified by these lofty valuations.