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Better Buy: Veeva Systems vs. HubSpot

By Leo Sun - Mar 25, 2021 at 8:15AM

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Which high-growth cloud CRM company has more upside potential?

Veeva Systems (VEEV 0.87%) and HubSpot (HUBS 0.18%) both simplify tasks for companies with their cloud-based services. Veeva provides customer relationship management (CRM), storage, analytics, and other tools to life science companies. Its services also keep track of clinical trials and industry regulations.

HubSpot bundles together CRM, marketing, lead generation, search engine optimization, and analytics tools in an all-in-one package. It mainly specializes in "inbound" marketing campaigns that encourage consumers to seek out brands on their own. HubSpot serves more industries than Veeva, and its platform is generally simpler and cheaper to operate than larger CRM platforms like salesforce.com (CRM -0.24%).

Veeva and HubSpot aren't direct competitors, but both companies have generated multibagger gains in just a few years. Veeva went public at $20 per share in 2013 and now trades at about $270. HubSpot went public in 2015 at $25 per share and is now trading around $460.

But can investors count on Veeva and HubSpot to keep rallying as rising bond yields spark a rotation from growth to value stocks? Let's take a fresh look at both companies to see which stock will fare better.

A network of people connected virtually.

Image source: Getty Images.

How fast is Veeva growing?

Veeva, which was co-founded by Salesforce's former VP of technology Peter Gassner, enjoys a first-mover's advantage in the life sciences market. That's why big pharmaceutical companies like AstraZeneca, Moderna, and Merck all use its services. Veeva's services run on Salesforce, and the company doesn't directly compete against the CRM giant in its niche market.

Veeva's number of customers increased 15% to 993 in fiscal 2021, which ended this January. Its main platforms, Commercial Cloud and Vault, expanded their customer bases by 11% and 19%, respectively.

Veeva also ended the year with a subscription revenue retention rate of 124%, which means its existing subscribers spent 24% more money on its services. That's up from 121% at the end of 2020, and indicates smaller healthcare CRM rivals like IQVIA aren't gaining much ground.

As a result, Veeva's revenue rose 33% for the full year, its adjusted operating margin expanded, and non-GAAP net income increased 36%. It also remained profitable on a GAAP basis.

Veeva sees its revenue rising 20% in fiscal 2022, but it expects its earnings to grow just 9% as it ramps up its investments and faces tougher comparisons to its prudent spending during the pandemic. However, Veeva reiterated its goal of generating $3 billion in annual revenue by fiscal 2025, which suggests it will grow its revenue at an average rate of roughly 20% over the next four years.

How fast is HubSpot growing?

HubSpot's revenue rose 31% in fiscal 2020, which aligns with the calendar year. Its adjusted operating margin also expanded, and its non-GAAP net income increased 10%. But unlike Veeva, HubSpot remains unprofitable on a GAAP basis, and its net loss actually widened last year.

A network of cloud computing connections.

Image source: Getty Images.

HubSpot's subscription retention rate rose from 99.9% in 2019 to 102.3% in 2020, but that's significantly lower than Veeva's retention rate, as well as the retention rates of many other high-growth cloud companies. However, its total number of customers still rose 42% to nearly 104,000 for the full year.

HubSpot expects its revenue to rise 31%-33% in fiscal 2021, and for its non-GAAP net income per share to grow 5%-10%. Like Veeva, HubSpot expects higher investments to weigh down its margins during the year.

This is a trend we're seeing across the entire CRM market: Salesforce also expects slower earnings growth this year as it integrates its takeover of Slack. Salesforce's expansion could generate headwinds for HubSpot since they have overlapping interests in the CRM and marketing arena, but HubSpot's ongoing growth also suggests there's still room for smaller players to thrive in Salesforce's shadow.

HubSpot hasn't provided any longer-term revenue growth forecasts like Veeva or Salesforce yet, but it could also generate double-digit growth over the next few years as more customers turn to its slim all-in-one platform as a simpler alternative to Salesforce and other bulkier CRM services.

The valuations and verdict

Veeva and HubSpot serve different types of customers, but both companies have carved out defensible niches and could benefit from the long-term expansion of the software as a service (SaaS) market.

But two key strengths make Veeva a better buy right now. First, Veeva trades at 70 times forward earnings, which is much lower than HubSpot's frothy forward P/E ratio of about 200. Second, Veeva faces less direct competition and is actually profitable by GAAP measures.

Therefore, I believe it's smarter to buy Veeva instead of chasing HubSpot. Investors could consider nibbling on HubSpot up here, but they should wait for its valuations to cool off before building a bigger position.

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Stocks Mentioned

Veeva Systems Inc. Stock Quote
Veeva Systems Inc.
VEEV
$163.68 (0.87%) $1.41
salesforce.com, inc. Stock Quote
salesforce.com, inc.
CRM
$163.73 (-0.24%) $0.39
HubSpot Stock Quote
HubSpot
HUBS
$337.28 (0.18%) $0.60

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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