Is Veeva Systems Stock a Buy?

Veeva Systems (VEEV -0.71%), a provider of cloud-based services for life sciences companies, recently posted strong fiscal fourth-quarter numbers. Revenue rose 27% year over year to $396.8 million, beating estimates by $16.6 million. Its non-GAAP net income climbed 47% to $126.1 million, or $0.78 per share, which cleared expectations by a dime. On a GAAP basis, its net income rose 56% to $102.9 million.

Those numbers were solid, but Veeva stock dipped after the company released its earnings report, and shares declined further amid the ongoing sell-off in pricier tech stocks.

As a result, Veeva stock has fallen 6% year to date, though it remains up nearly 75% over the past 12 months. So should investors buy the dip or wait for lower prices?

Image source: Getty Images.

The bull case for Veeva

Veeva's cloud services help life sciences companies manage customer relationships, store and analyze data, track clinical trials and regulations, and more. It enjoys a first-mover's advantage in this niche market, and a growing number of top drugmakers are signing up for its services to stay competitive.

The company ended fiscal 2021 with 993 customers, up from 861 a year ago. Its Commercial Cloud and Vault platforms expanded their customer bases by 11% and 19%, respectively, and Veeva ended the year with a subscription revenue retention rate of 124% -- up from 121% at the end of fiscal 2020.

Adjusted gross margin also held steady at 74.7% for the full year, and adjusted operating margin rose from 37.3% to 39.8% even as the company integrated its acquisitions of Crossix and Physicians World. As a result, Veeva consistently generated double-digit revenue and earnings growth throughout the entire fiscal year:

Data source: Veeva Systems. YOY = Year-over-year. *Non-GAAP.

For the first quarter of fiscal 2022, management expects revenue to rise 21% to 22% year over year, while non-GAAP EPS should increase 17% to 18%. And for the full year, Veeva expects revenue and non-GAAP EPS to grow approximately 20% and 9%, respectively. Its earnings growth will likely decelerate this year due to tough year-over-year comparisons when its margins benefited from lower travel expenses during the pandemic and higher ecosystem investments.

Image source: Getty Images.

However, the company reiterated its long-term goal of generating $3 billion in annual revenue by fiscal 2025. That longer-term forecast means revenue will grow at an average rate of about 20% over the next four years.

Earnings growth will be bumpier due to ongoing investments and acquisitions, but its retention rate and gross margin should remain high, because it faces little competition in its niche market.

With pharmaceutical giants like Pfizer, AstraZeneca, and Novartis already locked into its ecosystem, it seems highly unlikely that challengers like IQVIA and Dassault Systèmes' Mediadata will gain much ground.

The bear case against Veeva

There are plenty of compelling reasons to buy Veeva, but there's also one major reason to wait for a lower price: its valuation. At $255 per share as of this writing, the stock trades at 80 times fiscal 2022 earnings estimates and 22 times sales. Those multiples are high relative to its growth rates, making it a tough one to buy as investors rotate from growth stocks to value stocks.

Rising bond yields, concerns about higher interest rates, and a preference for undervalued stocks that could rebound after the pandemic ends are all fueling that rotation. Those trends will likely limit the near-term gains for pricier stocks like Veeva -- even if their businesses are still firing on all cylinders.

Veeva deserves its premium valuation

Veeva Systems stock has consistently traded at high valuations since its IPO in 2013, but the stock has generated a near-13-bagger return since its IPO, and investors who fretted over its valuation would have missed out on all those gains.

Its first-mover advantage in a high-growth niche, expanding customer base, high retention rate, and stable margins will all continue to justify its premium valuation and make it an attractive long-term investment.

So instead of trying to time the near-term bottom in Veeva stock, investors should accumulate shares as the market temporarily shies away from high-growth stocks. Veeva is on track to hit its $3 billion revenue target in fiscal 2025, and its valuation should gradually cool off -- the current price level will seem cheap in retrospect several years from now.