In spite of another strong quarterly update and finishing out 2019 strong, shares of Veeva Networks (NYSE:VEEV) haven't been able to gain positive traction since last summer. Still off all-time highs by nearly 20% and putting up double-digit growth along the way, what we have here is a serious correction in a solid healthcare technology firm.  

Granted, the stock was on a tear through the first half of 2019, so a breather was due. However, with the initial peek into 2020 showing more of the same business performance ahead, now looks like a good time to add to positions.

A doctor in a lab coat holding a stethoscope up to an illustrated icon of a person.

Image source: Getty Images.

Subscriptions are where it's at

Veeva's revenue increased 28% last fiscal year to $1.1 billion, including a 34% increase during the fourth quarter. The final period of the year got a boost from the two acquisitions (Crossix and Physicians World, more on that in a moment) made during the last few months of the year.  

Fueling Veeva's results was the addition of 142 clients (up to 861 at year-end) and subscription revenue retention rate of 121% -- implying that existing clients increased spending an average of 21% during fiscal 2020. At just over 80% of total sales, it's these recurring revenue cloud-based software services aimed at life science industries (biotech, pharmaceutical, and a growing list of related companies) that are doing the real heavy lifting for the top and bottom line.  

Fiscal Year

Subscription Revenue

YOY % Growth

Gross Profit Margin

2017

$434 million

37%

78.3%

2018

$554 million

28%

80.1%

2019

$694 million

24%

83.2%

2020

$896 million

29%

84.8%

YOY = year over year. Data source: Veeva Systems.

Expanding into adjacent markets

Veeva's cloud-based software platform has plenty of fuel left in the tank. New markets adjacent to life sciences are being entered (like chemicals and cosmetics, and healthcare where Crossix will help Veeva customers manage patient data and marketing), and new services aimed at assisting existing customers are also being started. CEO Peter Gassner explained the company's strategy going forward on the last earnings call:

We accelerated our pace of innovation in established and new markets and we made a potentially transformative acquisition with the addition of Crossix. We've refined our operating model for driving innovation in existing markets while also creating new agile start-ups within Veeva. This gives our start-ups, like CDMS (clinical data management) and Safety, the autonomy to be laser focused on new markets, while our core teams remain dedicated to transformation in their areas like in CRM (customer relationship management) for example, where we are embedding AI in ways that will fundamentally advance the industry.  

There's a lot going on at Veeva, and management sees a clear path to reaching $3 billion in annual revenue in 2025. Given its momentum, this is one of the best stocks there is for the healthcare and related industries. But there's a caveat: Shares remain at a high price. The stock is currently trading for 52.7 times trailing 12-month free cash flow (what's left after basic operating and capital expenses are paid), and about 57.6 times 12-month forward expected adjusted earnings. Put another way, even after the stock correction, this is a premium-priced company.

For the kind of consistent growth numbers and high profit margins Veeva has been putting up, though, a premium goes with the territory. For investors looking years down the road, now looks like a decent time to add a few shares to the portfolio -- and expect to add more later on when the inevitable bumps in the road show up again.