Veeva Systems (VEEV -0.58%) stock has been setting new all-time highs since the middle of last year. Winning stocks tend to do that. The cloud-based applications provider hit yet another record high on May 26, although the share price has retreated slightly since then.
The inevitable questions that investors face with a hot stock like Veeva are whether the good times will continue to roll or whether gravity will take its toll. Here are the arguments for buying, selling, and holding Veeva Systems stock -- and which one looks like the best choice for investors right now.
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Buy: The sky's the limit
Veeva yet again posted a blowout quarter when the company announced its first-quarter results on May 25. Revenue was up 32% year over year. Earnings soared 167% on a GAAP basis and 47% on a non-GAAP basis. Veeva's management expects even better things in store for the second quarter.
The company's growth potential appears to present a compelling reason to buy the stock. Veeva stated that the number of customers in the first quarter with multiple Vault clinical applications increased 70% over the prior-year period. This is a great trend for a couple of reasons. First (and most obvious), Veeva's revenue increases. Second, and probably more important over the long run, Veeva's applications become more "sticky" -- customers using more applications are much less likely to switch to another software application down the road.
Veeva continues to launch new products and enhancements to existing products, with the new Sunrise user interface for its customer relationship management system serving as a prime example. This innovation should allow the company to attract even more customers in the life-sciences industry.
However, the biggest growth opportunity for Veeva is in expanding into new industries. The company announced last year plans to target customers beyond life sciences. Veeva landed a large consumer packaged-goods customer in the first quarter -- a sign that its efforts are achieving some success. If Veeva can keep the momentum going in attracting customers in other industries, the sky is the limit for how high the stock could possibly go.
Sell: The valuation is sky-high
The strongest reason to sell Veeva Systems stock is that it has simply become too expensive. Veeva's shares trade at nearly 103 times trailing-12-month earnings and at more than 64 times expected earnings. That's a sky-high valuation in anyone's book.
But don't Veeva's growth prospects make the stock valuation more attractive? Yes, but not too much more so. The consensus among Wall Street analysts is that Veeva will grow earnings by an average annual rate of 22% over the next five years. That's solid growth, but it's not nearly enough to make the stock valuation appear attractive.
Legendary investor Peter Lynch popularized the PEG ratio, which is the price-to-earnings ratio divided by the estimated growth rate. His theory was that a growth stock with a PEG of 2.0 or more has its growth prospects baked into the stock price already. Veeva Systems' PEG ratio currently stands at 3.51.
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Hold: Wait and see
The middle-of-the-road alternative is to hold on to shares if you already own Veeva stock and to hold off on buying if you don't. This approach acknowledges the strong growth prospects for the company and its premium valuation.
If Veeva gains more traction in winning customers in industries outside life sciences, buying shares could be a smart move. That would mean the company could grow more quickly than Wall Street analysts project.
What if Veeva hits a bump in the road and the stock pulls back? That could present a buying opportunity for new investors if the valuation becomes a little less frothy.
Best move?
While I couldn't blame an investor for wanting to lock in some profits by selling shares of Veeva, the opportunities for the company are too great, in my view, to sell on a large scale. The strategy of holding, or holding off, has some merits and could be the best approach for risk-averse investors.
If you're comfortable with risk and have a well-diversified portfolio, I think buying a new position in Veeva or adding to an existing position will pay off over the long run. Yes, Veeva could hit that bump in the road or encounter more difficulties than expected in expanding into new industries. However, there's no way to know for sure what will happen in the future.
What investors can know is that Veeva Systems is marketing products for which customers obviously see value and are willing to buy. They can know that the company continues to innovate successfully. And they can know the strategy of expanding into new markets is a smart one that, if executed well, presents a major source for future growth. There could be a few clouds along the way, but I see mainly blue skies ahead for Veeva Systems.
