Shares of Veeva Systems Inc. (NYSE:VEEV) hit an all-time high earlier this year, but the market responded harshly to recent signals suggesting years of blazing-fast growth are coming to an end. The company's cloud platform for the world's drugmakers is more popular than ever, and long-term investors are right to wonder if the recent pullback is a good opportunity to climb aboard the Veeva growth train.
To see if Veeva stock is a buy on the recent dip, let's begin by looking at how fast it needs to continue growing to provide a satisfactory return.
Measuring Veeva's stock price against the usual valuation metrics throws off some frightening figures. Despite the recent pullback, the stock has been trading at about 70 times trailing earnings. Even in the midst of a record-breaking bull market, the average stock in the S&P 500 can be had for just 24.25 times trailing earnings.
Of course, the average stock in the benchmark index hasn't expanded its bottom line at a 43% annual growth rate for the past five years. Standard P/E ratios can make quickly growing companies appear overvalued. This is why the price-to-earnings-growth ratio, or PEG ratio, is especially useful when looking at companies like Veeva that are expanding at a breakneck pace.
Stocks with a forward PEG ratio of less than one are generally considered undervalued. Veeva's PEG ratio of 0.64 falls squarely into bargain territory, with an important caveat. The bottom line needs to continue growing by leaps and bounds if this stock is to provide market-beating returns over the long run.
Repeat performance ahead?
During the fiscal year ended this January, Veeva reported total revenue 31% higher than the year before. When the company reported fiscal second-quarter results in August, Veeva upset investors with an outlook that suggests total revenue will only grow about 24% this year.
Despite the relative slowdown, a shift to higher-margin revenue streams could help profits outpace sales. Low-margin professional service revenue has slid from 25.6% of total sales in 2015 to just 19.4% in the first half of Veeva's current fiscal year. That might not seem like a huge difference, but the gross margin on subscription revenue is so much higher than professional services that the segment generated 92.7% of the company's total gross profit in the first half.
Looking ahead, subscription service margins could get even wider. Veeva's flagship customer relationship manager is built on the salesforce.com platform, which the company pays a fee to use. Veeva's more recently developed suite of proprietary content management applications incurs no such fees and is the company's widest avenue for continued growth.
Plenty of room in this vault
Arranging all of the data that global, multicenter clinical trials throw off is a daunting task, but Veeva Vault is rapidly reducing the industry's reliance on paper, pencils, and spreadsheets. For example, Vault eTMF is an application that enables collaboration between pharmaceutical companies that sponsor trials and the contract research organizations that run them. In the second quarter, Vault eTMF's subscription revenue run-rate increased 66% as the number of customers using it rose 31% over the same period last year, and it's just one of 14 Vault applications available right now.
It turns out the ability to meet compliance requirements placed on life sciences companies translates smoothly into other industries that government agencies like to keep tabs on, such as chemicals, consumer goods, or practically any business with a quality control department. The rapid uptake of Veeva Vault services within life science industries is encouraging, but recent expansion to more highly regulated environments is downright exciting. The company rolled out Veeva Vault QualityOne earlier this year and quickly signed up one of the world's five largest consumer packaged goods companies, which has since expanded its relationship with Veeva.
Remember, Veeva owns the suite of Vault applications outright, and there aren't any viable competitors in sight. It's still too early to predict another growth explosion from companies outside of life sciences, but the initial success we've already seen certainly makes it a possibility.
Demand for high-margin Vault services from the life sciences industries alone looks sufficient for Veeva to continue growing earnings fast enough to justify its high valuation. When you consider the enormous upside potential penetrating other industries presents, though, this stock looks like a screaming buy.
Cory Renauer has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Veeva Systems. The Motley Fool recommends Salesforce.com. The Motley Fool has a disclosure policy.