Better Buy: Veeva Systems vs. Salesforce

Software-as-a-service (SaaS) companies are good additions to any stock portfolio that is looking for a component of growth. These platforms can be an attractive investment because of their power as business enablers. The software is often easy to implement and can drive efficiency or add new capabilities for businesses. Veeva Systems (VEEV 1.59%) and Salesforce.com (CRM 0.17%) are two such examples that have built robust cloud software solutions for the customers they serve and have been great investments for shareholders over the last five years.

VEEV data by YCharts

Let's dive in to better understand this duo and determine which would be the better buy today. But first, let's look at some high-level metrics for both companies.

Key business metrics

Veeva started in 2007 with a focus on life science customers and has grown into a $1 billion business serving that industry. Salesforce started eight years earlier with a cloud-based customer relationship management (CRM) platform that has grown into a $16 billion business.

Note: Debt does not include lease liability. Data from company reports and Yahoo! Finance. Table by author. 

Salesforce is larger than Veeva by almost every measure and its revenue growth is quite impressive for its size, but let's dive into the business of Veeva first.

The case for Veeva

Veeva's software helps life sciences companies develop, manufacture, and maintain compliance in this highly regulated industry. Its industry-focused platform was built by collaborating with customers to develop a deep understanding of industry requirements and implementing best practices into its products. Because of its product breadth, customers often start with one module and expand into more modules over time. In the last three years, it has recorded subscription services revenue retention rates in excess of 120%, meaning customers spend 20% more this year than the previous year. 

Image source: Getty Images.

The company is just starting to tap into the opportunities in the life sciences industry, but is using its industry-focused approach to expand into three new regulated industries: consumer goods, chemicals, and cosmetics. Adding in this new market brings its total addressable market to $10 billion.

One highlight for investors is that Veeva is highly profitable, unlike many of its peers, which are foregoing profits to invest in growth. In fact, last quarter, its net income grew 28.2% year over year and is now an impressive 29% of the top line. Now it's focused on a goal of achieving a $3 billion revenue run rate by the calendar year 2025, and it has a number of levers to ensure it can get there.

Now let's look at why Salesforce could be a better investment.

The case for Salesforce

Salesforce started with a software product to better manage customer relationships, but has expanded its offerings to include tools for sales, marketing, service, and analytics. Its history of growth has been amazing. It's the only U.S. company to exceed 20 years of 20%-plus consecutive annual revenue growth, and it's planning on continuing the streak. At its recent Dreamforce conference, where it hosts customers, partners, and investors to interact with the company, it shared its goal to double its revenue over the next four years. 

Its detailed plan to double revenues includes acquisitions and a focus on industry verticals. It has plenty of opportunity ahead with an annual addressable market growing to $168 billion by 2023. But its size and growth ambitions are driving complexity. The picture below from its investor presentation is a good perspective of how it has to subdivide its marketing and sales efforts to unlock all of its opportunity. 

Image source: Salesforce investor presentation.

But the cube above is actually a simplified pictorial of what it's doing. The one row that is titled "industries" represents seven different verticals that are helping to segregate and grow its market share. Achieving growth at this scale is not unprecedented in the software business. Microsoft faced similar challenges as it grew, but ended up attracting healthy competition in areas where the software giant wasn't executing as well. There's no doubt that this company that pioneered customer relationship software is well-positioned to manage its size and untapped opportunity, but it's not going to be easy.

The bottom line for investors

Taking a look at valuation metrics, these two quality companies look expensive. But their reputations as stalwarts in their fields make them attractive long-term investments, and you would do well owning either stock (or both). 

Note: P/S=Price-to-sales. P/E=Price-to-earnings. Data source: Yahoo! Finance. Table by author.

Salesforce's price-to-sales ratio looks more attractive, but its growth is dependent on capitalizing on its 20-plus acquisitions from the last four years and overcoming the challenges related to its ever-growing organizational complexity. If I'm forced to choose only one of these two exceptional software-as-a-service operators, I'd give the edge to the smaller, more profitable, and less acquisitive Veeva as the better buy.