Veeva's CRM services help life science companies maintain their relationships with customers, store and analyze data, and keep track of all the latest regulations and clinical trials. Its growing list of more than 1,000 customers includes pharmaceutical giants like AstraZeneca, Moderna, and Merck.
Zendesk provides CRM services to over 160,000 clients across a wide range of industries. Unlike Salesforce (CRM -2.21%) -- the CRM market leader, which mainly serves larger companies -- Zendesk primarily offers basic customer support and ticketing services for small to medium-sized companies.
Veeva and Zendesk both work with Salesforce. Veeva co-founder and CEO Peter Gassner was once Salesforce's senior VP of technology, and Veeva's platform still runs on Salesforce's services. Zendesk's platform can be natively integrated with Salesforce's to provide growing businesses with additional tools.
In an article published in December, I compared these two CRM companies and declared that Zendesk's improving fundamentals and lower price-to-sales ratio made its stock a better buy than Veeva's. However, Zendesk's stock has dipped about 5% since I made that call, while Veeva's stock has stayed nearly flat. Did I overestimate the market's potential interest in Zendesk? Let's take a fresh look at both companies to find out.
Veeva generates rock-solid growth
Veeva's revenue rose 33% to $1.47 billion in its fiscal 2021, which ended Jan. 31. Its adjusted operating margin expanded from 37.3% to 39.8%, and its adjusted net income grew 36% to $473 million. It ended the year with a net retention rate of 124%, which means its existing customers spent 24% more money year over year on its services.
In the first quarter of its fiscal 2022, Veeva's revenue grew another 29% year over year to $434 million, its adjusted operating margin expanded from 38.5% to 41.8%, and its adjusted net income jumped 40% to $147 million.
For the full fiscal year, Veeva expects its revenue to increase by 24% to 25%, its adjusted operating margin to remain stable, and for its adjusted earnings per share (EPS) to grow by 19%. It also anticipates that it will generate $3 billion in annual revenues with an operating margin exceeding 35% by 2025.
Veeva's growth remains consistent for two simple reasons. First, it enjoys a first-mover advantage in the life sciences niche and doesn't face any meaningful competitors. Second, escalating competition between drugmakers -- which will continue for the foreseeable future -- is fueling higher demand for Veeva's cloud-based services.
Veeva is also one of the few high-growth cloud companies that have remained consistently profitable by both GAAP and non-GAAP measures.
But Zendesk is just as consistent
Zendesk's revenue rose by 26% to $1.04 billion in its fiscal 2020, which aligns with the calendar year. Its adjusted operating margin rose from 3% to 7%, and its adjusted net income increased 71% to $63 million.
In the first quarter of 2021, Zendesk's revenue grew another 26% year over year to $298 million. Its adjusted operating margin expanded from 4% to 8%, while its adjusted net income grew 72% to $22 million. It ended the period with a dollar-based net expansion rate of 114%, which is roughly comparable to Veeva's net retention rate.
Zendesk expects its revenue to increase 25% to 27% for the full year and for its adjusted operating margin to hold steady. Analysts expect its adjusted earnings to rise by 33%. However, Zendesk still isn't profitable on a GAAP basis, and it doesn't expect that to change this year.
Zendesk hasn't provided any ambitious long-term revenue forecasts like Veeva has yet, but it expects its net expansion rate to remain between 110% and 120% in a "normal market environment" as it courts larger customers and rolls out new platforms like Zendesk Suite.
Zendesk still indirectly competes against Salesforce, but its stable outlook indicates that it has secured a defensible niche in the CRM market with its simpler ticketing and support services.
The valuations and verdict
As of this writing, Veeva trades at 71 times forward earnings and 24 times this year's sales. Zendesk has a forward P/E ratio of 127 and trades at 12 times this year's sales. Neither stock can be considered a bargain as investors rotate from growth to value stocks.
But if I had to choose one over the other, I'd choose Veeva over Zendesk this time because it's profitable on a GAAP basis, trades with a lower P/E ratio, faces fewer competitors, and is offering investors clearer predictions of its growth trajectory over the next few years.