Veeva Systems (NYSE:VEEV) is a cloud-based data management service provider focused on the life sciences industry, and there really is a lot to manage. From customer relationship management to regulatory compliance management, there really aren't any competitors geared to the same businesses.

Shares of the cloud service provider have tumbled about 15% since reaching a peak in July, but they still aren't cheap. Is now a good time to buy Veeva Systems, or is the recent dip a sign of more trouble ahead? Here's what you need to know.

Person in a suit measuring risk against bags of money.

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Reasons to buy

Veeva Systems offers the life sciences industry cloud-based tools that have expanded from just customer relationship management (CRM) based on's (NYSE:CRM) platform to Veeva's wholly owned services. During the company's fiscal second quarter, which ends a month later than the calendar quarter, higher-margin Veeva Vault revenue surpassed revenue from its CRM service for the first time.

More high-margin revenue from Veeva Vault has allowed profits to grow even faster than the top line. Revenue during the second quarter rose 27% year over year, while operating income jumped 40% during the same period.

Recurring subscription revenue from the life sciences industry has steadily moved in the right direction as new customers sign on and existing customers subscribe to more services. This well-managed company has been profitable for years and that profit is accelerating.

Trailing free cash flow reached $399 million in the second quarter, and Veeva finished July with around $1.4 billion in cash on its debt-free balance sheet. There aren't any major competitors in the markets that Veeva has created on its own. Once a threat finally presents itself, though, Veeva will have plenty of cash to make a strategic acquisition.

Scientist reading a laboratory report.

Image source: Getty Images.

The main reason to remain cautious

Despite a recent 15% haircut, Veeva Systems stock is still priced like a rocket-propelled growth stock. Veeva thinks adjusted earnings will come in at around $2.12 per share for the full year, which puts the stock's recent price at around 72 times earnings expectations.

If the company doesn't continue delivering impressive gains for at least a few more years, investors buying shares now could suffer heavy losses.

Investors should know that during the past three fiscal years, year-over-year revenue growth fell from 35% in 2017 to 25% in 2019. Management expects revenue growth to continue declining, but hasn't provided any detailed projections.

Fiscal second-quarter sales rolled in 27% higher compared to the previous year, so there aren't any signs of a slowdown yet. Investors should be aware that Veeva's stock price would fall around 64% if the market suddenly applied the same price-to-sales multiple to Veeva that Salesforce receives.

Salesforce hasn't been moving in slow motion, either. In the first half of 2019, the CRM service provider reported a 23% year-over-year revenue gain. That was just a few percentages points slower than Veeva's recent performance.

Why Veeva is held to a higher standard

Before Veeva investors begin jumping ship, it's important to realize that over the past few years, it looks like Salesforce has been paying heavily to acquire and retain customers in an increasingly competitive market.

VEEV Revenue (TTM) Chart

Data by Ycharts.

The life sciences industry, and the drug development process specifically, is so wonky that it's hard to imagine any start-up meeting enough specific needs at a competitive price point that can convince Veeva's customers to switch. That means, unlike with Salesforce, we can reasonably expect steady earnings growth in the foreseeable future. 

A buy now?

Veeva Systems counts half of the world's top 20 pharmaceutical companies as subscribers, which would signal an approaching saturation point if there were any viable competitors. Since Veeva has the niches it created all to itself, drugmakers, academics, and businesses in other highly regulated industries will probably continue flocking to the suite of tools they can't find anywhere else.

An eventual subscription growth slowdown is inevitable, but a severe downturn in the next several years seems unlikely. There's just too much room to grow in the niches Veeva created on its own.

A sudden revaluation of Veeva's stock price to a level resembling the wider CRM industry would be unnerving. Over the long run, though, steady earnings growth will probably lead to market-beating returns. That makes Veeva Systems a great stock to buy now -- and hold for decades.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.