Where Will Veeva Systems Be in 5 Years?

Shares of life sciences technologist and software provider Veeva Systems (VEEV 1.44%) have been a big winner for the last few years. They've gained 400% over the last five-year stretch, and owning them has been one of the best ways to play the pharmaceuticals and biotech industry.  

Even after an epic run, Veeva continues to put up solid double-digit sales growth and even faster profitability expansion, and the cloud-based software firm also reached a revenue milestone well ahead of schedule. On the heels of a recent software stock pullback and with digital transformation taking center stage, now looks like a good time to buy in or add to positions. There will be plenty of ways for Veeva Systems to grow even more in the next five years.

Illustrating the sales conversion to profits

Veeva provides various cloud-delivered software services like data management, regulatory compliance tools, and customer relationship management for pharmaceutical and biotech companies. Biotech is fraught with unique challenges that make the industry especially volatile, and Veeva has been a comparatively stable way to invest in the space.

Sales are growing fast, and as they do, gross profit margin on services sold is improving as well -- indicating Veeva has yet to reach optimal scale. Revenue has even accelerated slightly so far during the 2020 fiscal year, up 26% compared with 25% during the 2019 fiscal year. Operating expenses are of course also growing, but at a slower pace.  

Data source: Veeva Systems. YOY = year over year. Pp = percentage points.  

It all adds up to a technology platform that is maturing, and as it does so, sales are getting converted into big bottom-line gains. In terms of free cash flow (basic profits, measured by subtracting cash operating expenses and capital expenditures from revenue), the above chart equates to huge gains for the shareholders.

Data by YCharts.

Granted, the increased cash flow means Veeva trades at premium pricing -- trailing 12-month price to free cash flow is at 58.1 as of this writing -- as the market is anticipating this well-above-average pace of growth will continue for the foreseeable future. Is that an unrealistic expectation?

A robust product pipeline that keeps getting better

Global spending on digital transformation is expected to grow well into the double digits for the foreseeable future, and pharmaceutical, biotech, and medical device companies aren't exempt from the transition. During the summer of 2019, Veeva reported that its product suite Vault -- a comprehensive collection of apps and data management tools -- surpassed 50% of total revenue. This milestone was a year and a half ahead of schedule according to management, and has years of growth ahead of it as life science businesses continue to look for ways to update their business models for the 21st century. CEO Peter Gassner had this to say about his company's marquee product: 

Vault now has nearly 650 customers and as of Q2 represents more than 50% of total revenue. This is an exciting milestone. When we started Vault a number of years ago, the potential was clear to me. And as I look ahead it's also clear that we are in the early days of Vault. This quarter, a newly independent top-20 medical device company standardized on Vault across the organization, including clinical, quality, regulatory, and commercial. With the ability to start from a clean slate they chose Vault because it's the only solution to provide best-in-class application suites on a single modern cloud platform.

Within the range of available Vault customizable suites, Gassner added that Vault CTMS -- geared toward companies managing clinical trials and process management for new treatment development -- is gearing up to be an industry-leading software solution as regulatory demands increase for biotechs over time. Other highlights include Veeva's customer relationship management (CRM), which has also been getting put to use by global pharmaceutical distributors. In this department specifically, Veeva battles with salesforce.com (CRM 0.33%) and its own selection of digital tools for life sciences.

But Veeva's laser focus on the life sciences industry and solutions that round out CRM has helped it win expanded relationships with customers in spite of competition from the likes of Salesforce, Cerner (CERN), and others. It has built out arguably the most comprehensive suite of software tools to help life science companies bridge the gap between old legacy operations and the digitally driven operations of the future. In five years' time, it's safe to say Veeva will have quite a few more customers than it does today, and its high profit margins mean new sales should continue to convert to an even higher bottom-line increase over time. Owning Veeva remains one of the best ways to bet on the world of healthcare and biotechnology, in spite of the high price tag.