One lesson of the March 2020 market crash is that stocks can drop much faster than anyone expects. To take advantage of those opportunities, investors need to do their homework, preparing to buy great companies when short-term gyrations in their stocks offer an attractive price.
At the top of my list for the next crash is Veeva Systems (VEEV 0.40%). The founder-led cloud software provider has been remarkably consistent since going public in 2013. The company has continuously offered new applications to solve more of its customers' problems and is now stretching beyond the life sciences industry, dramatically expanding its addressable market.
Solving problems for customers
Veeva Systems was founded on the idea that cloud software would become more industry-specific as it matured. With two co-founders, one from Silicon Valley and the other a life sciences veteran, it made sense to build an application to help biotech and pharmaceutical companies market their products.
That simple idea has led the company to develop many more applications grouped into two packages: the Veeva Commercial Cloud and Veeva Vault. Each of these applications helps life sciences companies navigate the end-to-end drug development process efficiently.
The Commercial Cloud combines customer data, artificial intelligence, and a personalized customer experience to increase stakeholder engagement. What began as a tool to manage customer relationships has grown into a hub for customer and patient data and a suite of analytics tools to plan and execute marketing and sales strategies, as well as to create and distribute content for medical, legal, and regulatory reviews.
Vault, meanwhile, is designed for managing content and data to streamline workflow around regulatory, safety, quality, medical, and commercial tasks. The result is accelerated clinical trials thanks to centralized content, data, and communications. Vault helps drugmakers launch and manage studies, report adverse events, comply with regulatory standards, register products, and submit results.
The consistently impressive growth in Veeva's customers and revenue is a testament to the company's success in creating an industry-specific product. Not only is the number of customers growing, but customer spending has also increased every year. That's a sign that as the company develops new applications, existing customers are eager to pay for the added capabilities because they solve other problems. There is no reason this strategy can't be repeated in other industries.
|For Year Ending Jan. 31||Customers||Revenue||YOY Revenue Growth||Revenue per Customer|
|2020||861||$1.1 billion||28%||$1.28 million|
|2019||719||$860 million||25%||$1.20 million|
|2018||625||$690 million||25%||$1.10 million|
|2017||517||$550 million||35%||$1.06 million|
|2016||400||$410 million||31%||$1.02 million|
When Veeva reported its third-quarter earnings, management offered guidance for the full year ending Jan. 31, 2021, of $1.45 billion. That's a 31% year-over-year rise, indicating that the 14-year-old company is accelerating its growth. And management has a plan to keep the business from slowing down anytime soon.
Expanding the addressable market
Veeva has more ways to grow than just developing new applications for its life science customers. The company has recently been marketing its applications to the consumer goods and cosmetics industries. Much like drug developers, these highly regulated businesses must bring their products to market through a rigorous testing process that requires a lot of data to track and report results.
Aside from mentioning individual wins on earnings calls, management hasn't broken out the number of customers or amount of revenue generated from new industries. It has noted that the sales cycle is long and that it's difficult to beat an incumbent software application. Comments like that could frustrate investors looking for the hypergrowth of newer cloud software companies. But patient shareholders should view the steady penetration of a new industry as proof that Veeva can sustain its growth rate far into the future.
An investment that lets you sleep at night
Veeva Systems has a history of impressive growth thanks to its ability to introduce new applications to solve an increasing number of problems in the end-to-end workflows for its life sciences customers. With both the number of customers and the average spend per customer growing annually, it's clearly in touch with customer needs.
As the company moves into the similarly regulated consumer goods and cosmetics industries, expect the growth and innovation to continue, and the valuation to remain stretched. Great businesses are often priced at a premium, and Veeva is no exception. The current price-to-sales (P/S) ratio is 34, near its high of the past five years. But over that time the market has realized the quality of the business. The lowest P/S during the March 2020 sell-off was 20, double what the ratio averaged in 2016.
If that is any indication, this business may never be considered cheap again. Patient investors shouldn't be too picky about valuation during the next marketwide sell-off. Shares of Veeva Systems are likely to reward them over the long term.