Last May, I compared two cloud-based customer relationship management (CRM) companies: Veeva Systems (VEEV 3.56%), which mainly caters to life science companies, and salesforce.com (CRM 7.44%), its longtime partner, which serves a wider range of industries.
At the time, I claimed Veeva's wider moat and stronger GAAP profits made it the better investment. Since then, Veeva's stock price has risen over 60% as Salesforce's stock price has advanced about 35%. But will my thesis hold up throughout the rest of the year? Let's take a fresh look at both cloud-based companies to decide.
The relationship between Veeva and Salesforce
Salesforce owns the world's largest cloud-based CRM platform. It controls nearly 20% of the market, according to IDC, while its closest rivals all hold single-digit shares. It also provides related cloud-based services for analytics, marketing, and e-commerce.
Salesforce's services help companies automate repetitive tasks, crunch their data more efficiently, and make data-driven decisions. In short, it helps companies streamline their operations, cut costs, and reduce their long-term dependence on human employees.
Salesforce's former VP of technology, Peter Gassner, co-founded Veeva in 2007 after spotting an unmet need for dedicated CRM services in the life sciences industry. Veeva built its CRM platform on top of Salesforce's cloud platform, and it will likely renew that partnership after it expires in 2025.
Veeva's CRM platform helps drug companies maintain customer relationships. Its other major cloud service, Vault, helps drugmakers store and analyze data while tracking clinical trials and regulations.
Veeva enjoys a first-mover's advantage in its niche, and its growing list of over 950 customers includes pharmaceutical giants like Pfizer and AstraZeneca. Escalating competition between these companies will continually boost demand for Veeva's services.
Which company is growing faster?
Salesforce and Veeva both generated consistent growth throughout the pandemic. Salesforce's revenue rose 26% year over year in the first nine months of fiscal 2021, which ended in January, with double-digit percentage growth across its service, sales, and marketing and commerce clouds.
Salesforce expects its revenue to rise 23% for the full year, and increase another 21% to roughly $25.5 billion in fiscal 2022. It also reiterated its long-term goal of doubling its annual revenue to more than $50 billion by fiscal 2026.
It expects the total addressable markets for all its services to continue expanding as companies streamline their sales teams, digitize their operations, and rely more heavily on data-driven decisions.
Veeva's revenue rose 35% year over year in the first nine months of fiscal 2021, which also ended in January. It expects its revenue to rise 31% this year, and climb another 18% to over $1.7 billion in 2022 after its laps its recent acquisitions of Crossix and Physicians World.
Veeva also reiterated its long-term goal of generating $3 billion in annual revenue by fiscal 2025. Like Salesforce, Veeva expects demand for its services to continuously rise as life science companies ramp up their spending on cloud-based services to stay competitive.
Based on these expectations, Salesforce and Veeva trade at nine and 28 times next year's sales, respectively -- which makes the former much cheaper than the latter relative to its revenue growth.
But what about the profits?
Unlike many recent high-growth tech IPOs, Salesforce and Veeva are both profitable by GAAP and non-GAAP measures. Salesforce expects its non-GAAP earnings to increase 55% this year, but Wall Street analysts expect a 25% decline in fiscal 2022 as it integrates its $27.7 billion takeover of Slack (WORK).
That integration should strengthen and simplify Salesforce's cloud services with Slack's unified communications platform, but Slack's losses could weigh down its near-term margins.
Veeva expects its non-GAAP earnings to grow 29%-30% this year, and analysts anticipate 9% growth next year. Based on these estimates, Veeva trades at over 100 times forward earnings, while Salesforce's forward P/E ratio remains just below 70.
The winner: Salesforce
I own both stocks and plan to hold them for years, but Salesforce has more near-term upside potential than Veeva right now. Its business is better diversified, its stock is cheaper, and its takeover of Slack -- like its purchases of MuleSoft and Tableau -- should improve its ecosystem, lock in its customers, and widen its moat against its smaller rivals. Salesforce remains a cheap play in a pricey sector, while significantly more growth is baked into Veeva's frothy valuations.