Many cloud-based SaaS (software as a service) stocks have surged over the past few years as companies have pivoted from locally-installed software to subscription-based services. That's because SaaS solutions are generally easier to scale, more cost effective, and more secure than local software.

There are plenty of SaaS companies to choose from, but I believe one stands out from the pack: Veeva Systems (NYSE:VEEV). Here's why I believe this stock is headed much higher over the next few years.

A medical researcher studies a transparent tablet.

Image source: Getty Images.

What does Veeva do?

Veeva was co-founded by Peter Gassner, salesforce.com's former senior VP of technology. During his time at Salesforce, Gassner spotted the untapped market potential for optimized CRM (customer relationship management) services for life science and pharmaceutical companies.

That revelation led to the founding of Veeva, which provides CRM, cloud storage, and analytics services for that sector. Its CRM services remain tethered to Salesforce's cloud platform, and the company will likely renew that partnership when it expires in 2025.

Veeva's customer base expanded from fewer than 200 customers in early 2014 to more than 950 customers in its fiscal 2021 third quarter (ended Oct. 31, 2020). That list includes pharmaceutical giants like Gilead Sciences, Moderna, and Pfizer.

The platform helps those companies maintain customer relationships. Its other cloud services also help companies track clinical trials and regulations, store and analyze data, and process documents more efficiently. Intense competition between these drugmakers continually fuels demand for Veeva's services.

How fast is Veeva growing?

That stable demand can be seen in Veeva's revenue growth, expanding gross and operating margins, and rising earnings over the past five years:

Fiscal Year

2016

2017

2018

2019

2020

Revenue Growth (YOY)

30.6%

32.9%

26.0%

25.8%

28.1%

Gross Margin*

67.2%

70.3%

71.3%

73.3%

74.7%

Operating Margin*

26.5%

29.4%

30.9%

35.6%

37.3%

Net Income Growth* (YOY)

40%

45%

32.4%

71.7%

36.4%

YOY = Year-over-year. Non-GAAP margins and net income. Source: Veeva.

In the first nine months of fiscal 2021, revenue rose 34.8% year-over-year as its adjusted earnings grew 32.6%. For the full year, management expects its revenue to rise 31% to about $1.45 billion, and for its adjusted earnings to increase approximately 30%.

In fiscal 2022, Veeva expects revenue to rise 18% as it laps two acquisitions (Crossix and Physicians World) that added roughly $100 million to the top line in the current year. However, Veeva still maintains its long-term goal of generating over $3 billion in annual revenue in 2025.

A wide moat and a sticky ecosystem

The company maintains that bullish forecast, because it enjoys a first-mover's advantage in its high-growth niche and doesn't face any meaningful competitors.

Its only notable rivals are IQVIA, a contract healthcare research company that also provides cloud-based CRM services built on Salesforce's platform, and Medidata, another software player that was recently acquired by the French software company Dassault Systèmes.

But neither company can match Veeva's reach in the healthcare market yet. Its high revenue retention rate of 121% in fiscal 2020, which means existing customers spent 21% more with the company throughout the year, indicates its platform is a sticky and fertile ground for cross-selling new services.

Veeva's integrations of Crossix, a patient data and analytics platform, and Physicians World, an events management platform for doctors, will further expand that ecosystem and widen its moat against its smaller rivals.

But be prepared to pay a premium

Veeva is a great long-term play on the SaaS market, but its stock isn't cheap at 130 times trailing earnings and 24 times fiscal 2022 sales.

However, Veeva's P/E ratio has periodically hit triple digits over the past five years, yet its stock soared nearly 1,000% during that period. The market clearly believed the company's strengths justified its premium valuation, and investors who were fretting over frothy multiples missed out on those multibagger gains.

But here's the good news: It's not too late to get onboard. With an enterprise value of about $40 billion and a realistic target of doubling its annual revenue over the next four years, Veeva still has plenty of room to run.