The COVID-19 pandemic has resulted in the rapid adoption of digital solutions as companies prepare themselves for the possibility of remote work becoming a long-term necessity. Looking at the issue from a broader perspective, these digital solutions for everyday tasks tend to also improve efficiency and productivity for organizations. This means that any additional value such services can provide makes them worth considering, regardless of the current situation.
In this article, I am going to share two software-as-a-service (SaaS) stocks in my portfolio. These companies have outperformed the broad market year to date and can continue to deliver going foward.
A life sciences software provider
Veeva Systems (VEEV -0.15%) provides a cloud-based software solution for the life sciences industry. The business has two main products -- Veeva Commercial Cloud and Veeva Vault -- with each contributing 50% of revenue.
For example, these products allow companies to manage their documentation for clinical trial data and regulatory and safety information. This documentation is vital and required for approval from administrative bodies such as the U.S Food and Drug Administration. The platform also streamlines customer relationship management, allowing users to increase their efficiency and compliance.
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The success of Veeva's offerings is evident from the company's stunning revenue growth, which has compounded at 28% over the past four years, increasing from $409 million in fiscal 2016 to $1.10 billion in fiscal 2020. This growth continued in the first quarter of fiscal 2021 with Veeva registering a 38% increase in revenue year over year.
The company is also profitable, generating $301 million in net profits last year, which is quite rare among SaaS businesses. Its growing bottom line comes on the back of expanding margins as customers adopt more of Veeva's solutions and generate incremental revenue for the company. On average, the number of commercial cloud products used by customers has increased from 2.47 in 2016 to 3.43 in 2020.
On a free cash flow basis, Veeva is strong having generated $483 million in the trailing 12-month period. Over the past four years, Veeva has seen its cash flow consistently increase thanks to expanding operating income and low capital expenditures.
The increasing cash flows are also reflected in the nature of a SaaS business as companies initially see significant cash outflow as they invest in infrastructure and acquire customers. This trend then reverses once the company reaches critical mass, and additional customers continue to drive incremental cash flow higher. Look at the subscription growth metric for the company -- Veeva has expanded subscription revenue from $316 in fiscal 2016 to $896 in the most recent year.
While the stock looks expensive at 30 times sales and 89 times forward earnings estimates, the company has barely scratched the surface in terms of its revenue and earnings potential. In fact, Veeva estimates that it has a total addressable market of $10 billion with $9 billion coming from the life science industry and $1 billion from outside of life sciences. While Veeva does not yet break out its revenue from industries it serves outside of life sciences, companies in the consumer goods, chemicals, and cosmetics industries have taken a liking to its product suite. With revenue currently sitting at $1.20 billion, this means it has massive growth opportunities ahead of it.
Near term, management announced in the first-quarter earnings release that it expects revenue to come in between $1.380 billion and $1.395 billion for 2021.
Management also mentioned some new features that it rolled out such as CRM engage meeting, which allows remote meetings, remote monitoring (essential for clinical trials), remote sampling, and telehealth metrics. Telehealth is another area that should see increased adoption moving forward, and with Veeva well positioned to offer insights in this area, it might have a yet another growth avenue ahead of it.
Making data analysis easy
Alteryx (AYX) is a low or no-code data analytics software provider. The software simplifies data preparation, giving users more time to focus on the analysis. This is essential as Frost & Sullivan estimates that the big data analytics market will grow at an annualized rate of 30%, reaching $40.6 billion by 2023.
The company's software can service a wide variety of industries -- financial services, healthcare, transportation, retail, and more. On this front, management commented in its latest earnings call, "Our Q1 bookings activity reflects the broad applicability of the Alteryx platform. The Company is in nearly every vertical across the globe. We believe digital transformation with a focus on analytics, process automation, and most importantly, the upskilling of workers remains a strategic imperative for many businesses." The software's usage across different industries is also evident from its large customer base, which stood at 6,443 at the end of the first quarter, up 30% year over year.
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The benefits of the software provided by Alteryx are further showcased by its growth -- revenue has more than tripled in just the past two years. On the profitability front, Alteryx is seeing growing gross and operating margins. In that same two-year period, gross margin expanded seven percentage points to 90.6%, while operating margin made a complete reversal from negative 13.8% to positive 9.1%. Management's long-term target for gross margin is between 90% and 92%, while its target for operating margin is in the range of 35% to 40%.
Like Veeva, Alteryx looks expensive at 24 times sales and 261 times forward earnings, but moving forward, management revealed the increased role it sees for data analytics: "From start to finish, this global pandemic and subsequent ones that may follow present a myriad of data and analytic challenges, and it requires business leaders to upskill their workforces to see data as an asset, analytics as a prowess and process as -- automation as a necessity."
Investors should also take note of the company's "land and expand" business model. Under this model, Alteryx first sells its Alteryx designer software to customers. It then incrementally sells other offerings to the customers as their relationship grows. This has proven to be a highly successful model, as evidenced by Alteryx's reported net expansion rate metric which has hovered around 130% for the past three years. The company has less of a need to spend money on customer acquisition, which means more revenue flowing to the bottom line or other investments
With data analytics set to maintain its torrid growth for years to come and current revenue at Alteryx making up just 1% of the estimated market size in 2023, the stock can fuel outsized returns in a long-term investor's portfolio.
