Back in June, I compared Veeva Systems (NYSE:VEEV) and Zendesk (NYSE:ZEN). Both cloud service companies remained resilient throughout the COVID-19 crisis, but I believed Veeva's wider moat, better profitability, and lower valuation made it a better buy than Zendesk.
Veeva's stock has risen about 40% since then, but Zendesk's stock surged more than 70%. Let's take a fresh look at both stocks to see why Zendesk defied my expectations -- and whether or not its stock still has room to run in 2021.
The CRM children of Salesforce
Veeva and Zendesk both offer cloud-based CRM (customer relationship management) services. Both companies are partnered with Salesforce (NYSE:CRM), which operates the world's largest CRM platform.
Veeva's CRM services, which are powered by Salesforce, serve life science companies. Its other cloud services help those companies store and analyze data, track clinical trials and regulations, and more. Veeva was co-founded by Salesforce's former SVP of Technology, Peter Gassner, who currently leads the company as its CEO.
Veeva enjoys a first-mover's advantage in this niche market, and its growing list of over 950 customers incudes pharmaceutical giants like AstraZeneca and Merck. Escalating competition between these companies keeps them locked into Veeva's services, and it still doesn't face many direct competitors -- which gives it plenty of pricing power.
Zendesk provides customer support services for over 160,000 customers worldwide. It indirectly competes against Salesforce in the CRM market, but there are a few key differences.
Salesforce's CRM platform provides a 360-degree view of the customer, then feeds that data into its other sales and marketing clouds. Zendesk's platform, which is easier to set up, is optimized for customer support and ticketing services. Zendesk offers native integration for Salesforce -- which means its customers can funnel data from Salesforce to Zendesk's services.
In short, Zendesk offers a simple customer support platform for small to medium-sized businesses, but bigger companies will likely prefer Salesforce's broader bundle of customer management, analytics, and marketing tools.
Which company is growing faster?
Veeva's revenue rose 35% year-over-year to $1.07 billion in the first nine months of fiscal 2021. Its adjusted gross margin dipped slightly, partly due to its acquisitions of the events management platform Physicians World and the patient analytics platform Crossix, but lower travel expenses during the pandemic boosted its adjusted operating margin, and its non-GAAP earnings grew 30%.
For the full year, Veeva expects its revenue to rise 31% to about $1.45 billion, and for its non-GAAP earnings to grow 29%-30%. Next year, it expects its revenue to rise 18% as it laps the Crossix and Physicians World's acquisitions (which added about $100 million in revenue in fiscal 2021), while analysts expect its earnings to grow 10%. Veeva also maintained its goal of generating $3 billion in annual revenue by 2025.
Zendesk's revenue rose 27% year-over-year to $746 million in the first nine months of fiscal 2020. It ended the third quarter with a net expansion rate of 112%, which indicates it generated 12% more revenue year-over-year from its existing customers. Veeva, which only updates its subscription retention rates annually, ended last year with a retention rate of 121%.
Zendesk was affected by the pandemic more than Veeva, since many of its customers are SMBs instead of healthcare giants. But by the third quarter, Zendesk claimed its churn rates had returned to pre-pandemic levels and its SMB revenue had stabilized.
Zendesk's adjusted gross margins expanded year-over-year in the first nine months, and its non-GAAP earnings jumped 91%. But unlike Veeva, Zendesk still isn't profitable on a GAAP basis.
For the full year, Zendesk expects its revenue to rise 25%-26%, and for its non-GAAP operating profit to soar 159%-174%. Analysts expect its adjusted earnings to grow 84%. Zendesk didn't provide any guidance beyond that, but analysts expect its revenue and earnings to grow 24% and 27%, respectively, next year.
The valuations and verdict
Veeva and Zendesk are both promising plays on the secular growth of the cloud market, but neither stock seems cheap right now. Veeva trades at 86 times forward earnings, while Zendesk has a forward P/E ratio of 185.
But in terms of their revenue, Veeva trades at 26 times next year's sales, while Zendesk trades at just 13 times next year's sales. That's actually a low P/S ratio for a high-growth cloud stock.
I still like both stocks as long-term investments, but Zendesk's expanding gross margins, high retention rate, improving profitability, and surprisingly reasonable price-to-sales ratio make it a more compelling buy than Veeva right now. It's also a more lucrative takeover target for Salesforce, which recently spent billions of dollars on companies like Tableau and Slack to strengthen its ecosystem.