Veeva Systems' (VEEV -0.58%) stock price recently popped after the cloud services company posted solid numbers for the first quarter of fiscal 2022. Its revenue rose 29% year over year to $433.6 million, beating estimates by $23.5 million. Its adjusted net income grew 40% to $146.9 million, or $0.91 per share, which also topped expectations by $0.13.
Those headline numbers were impressive, but investors might be reluctant to buy Veeva's stock as the market rotates from high-growth stocks toward value stocks and reopening plays. However, I believe Veeva remains a solid long-term investment, for five simple reasons.
Image source: Getty Images.
1. Dominating a high-growth niche
The cloud services market is crowded, but Veeva dominates its niche for life sciences customer relationship management (CRM) services. Ever since its founding 14 years ago, Veeva has helped biotech and pharmaceutical companies maintain customer relationships, store and analyze data, and track industry regulations and clinical trials on its cloud-based platform.
Its first-mover's advantage has attracted more than 1,000 customers, including Pfizer, AstraZeneca, Moderna, and Merck. Intense competition between all these drugmakers fuels constant demand for Veeva's services.
Other companies -- including IQVIA (IQV 0.41%) and Dassault Systèmes' Medidata -- also provide CRM services for life science companies, but Veeva's Fortune 500 customer base indicates it's still the dominant player in this high-growth market.
2. Rosy short-term and long-term guidance
Those strengths enable Veeva to consistently generate double-digit revenue and earnings growth.
|
Growth (YOY) |
FY 2017 |
FY 2018 |
FY 2019 |
FY 2020 |
FY 2021 |
|---|---|---|---|---|---|
|
Revenue |
33% |
26% |
25% |
28% |
33% |
|
Adjusted EPS |
43% |
27% |
70% |
34% |
34% |
Data source: Veeva Systems. YOY = Year over year.
For fiscal 2022, Veeva expects its revenue to rise 24%-25% and for its adjusted EPS to grow 19%. During the conference call, CEO Peter Gassner attributed that sunny guidance -- which has been raised on both the top and bottom lines since the previous quarter -- to the "significant outperformance" of its Development Cloud, which hosts its clinical, regulatory, quality control, and safety data, and the "continued strength" of its Commercial Cloud, which hosts its core CRM platform.
Over the long term, Veeva still believes it can more than double its annual revenue, from $1.47 billion last year to $3 billion in calendar 2025 (which includes most of fiscal 2026). That ambitious goal is comparable to salesforce.com's (CRM -0.57%) target of more than doubling its annual revenue by 2026.
3. High net retention rates and operating margins
Cloud service companies like Veeva generally gauge the stickiness of their ecosystems with their net retention rates, which measure their year-over-year revenue growth per existing customer. A rate exceeding 100% indicates a company is locking in customers and cross-selling more services. Veeva ended fiscal 2021 with a net retention rate of 124%, up from 121% in 2020 and 122% in 2019.
Meanwhile, its adjusted operating margin expanded 250 basis points to 39.8% in fiscal 2021, then climbed another 330 basis points year-over-year to 41.8% in the first quarter of 2022.
Veeva benefited from lower travel expenses during the pandemic, but its high net retention rate and expanding operating margins still suggest it has plenty of pricing power and scale in its niche market.
4. Consistent GAAP profits
Many high-growth cloud companies emphasize the growth of their non-GAAP profits, which exclude high stock-based compensation expenses and other "one-time" costs.
Yet Veeva is consistently profitable by both GAAP and non-GAAP measures. It spent less than 13% of its revenue on stock-based compensation expenses last year, and its GAAP net income increased 26% to $380 million, which was only slightly lower than its non-GAAP profit of $473 million.
Those stable profits indicate Veeva's cash flows will continue climbing, and it won't resort to dilutive secondary offerings to raise cash. It also has a clean balance sheet and isn't burdened by any term debt.
5. A reasonable long-term valuation
Veeva's stock doesn't initially look cheap at 71 times forward earnings and 24 times this year's sales. However, its price-to-earnings and price-to-sales ratios have remained elevated since its IPO in late 2013, and the stock has already generated a 14-bagger return since its public debut.
Therefore, investors who worried too much about Veeva's high valuations missed out on some massive gains. But I still don't think it's too late to buy the stock, since its valuations still look fairly reasonable relative to those of other high-growth cloud stocks in this frothy market.
Veeva isn't a stock for queasy investors, but I believe it will move much higher as it heads toward doubling its annual revenue by fiscal 2026. Its core business is strong, its ecosystem is sticky, its returns are predictable, and it still doesn't face any meaningful competitors in its niche CRM market.
