Veeva Systems' (VEEV 0.26%) stock price plunged 16% on March 3 after the life science cloud services provider posted its fiscal 2022 fourth-quarter earnings report.
Veeva's revenue rose 22% year over year to $485.5 million, beating analysts' estimates by $5.1 million. Within that total, its subscription services revenue increased 23% to $395.7 million.
On a generally accepted accounting principles (GAAP) basis, Veeva's net income declined 6% to $97.1 million. But on a non-GAAP basis, its net income increased 17% to $147 million, or $0.90 per share, which exceeded analysts' expectations by two cents.
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Those headline numbers looked solid, but Veeva's guidance indicated its growth would decelerate significantly in fiscal 2023. Let's take a fresh look at Veeva's business, its growth trajectory, and its valuations to see if investors should buy the stock after its post-earnings plunge.
Does Veeva really face a slowdown in fiscal 2023?
Veeva provides cloud-based customer relationship management (CRM), data storage, and analytics services to life science giants like GlaxoSmithKline, Johnson & Johnson, and Moderna. Intense competition between these companies keeps them all tightly tethered to Veeva, which doesn't face any meaningful competitors in its niche market.
Veeva ended fiscal 2022 with 1,205 customers, up 21% from a year ago. Its revenue and non-GAAP earnings per share (EPS) increased 26% and 27%, respectively, continuing its multi-year streak of rock-solid growth:
|
Period |
FY 2018 |
FY 2019 |
FY 2020 |
FY 2021 |
FY 2022 |
|---|---|---|---|---|---|
|
Revenue Growth (YOY) |
26% |
25% |
28% |
33% |
26% |
|
Non-GAAP Operating Margin |
31% |
36% |
37% |
40% |
41% |
|
Non-GAAP EPS Growth (YOY) |
27% |
70% |
34% |
34% |
27% |
Data source: Veeva. YOY = Year over year.
But in fiscal 2023, Veeva expects its revenue to only grow about 17%, and for its non-GAAP EPS to increase just 8%.
Veeva attributes that deceleration to three main headwinds. First, the emergence of several large R&D deals in its pipeline will cause its growth to decelerate in the first half of the year before stabilizing in the second half. It takes a longer time to recognize the revenue from these larger deals.
Second, some of Veeva's customers have been downsizing their sales teams, which puts pressure on its core CRM business. Lastly, the macroeconomic headwinds have caused some of Veeva's customers to postpone their big projects, which throttles the near-term growth of its commercial services.
Its 2025 targets remain intact
That near-term slowdown is disappointing, but CEO Peter Gassner also said Veeva "continued to track ahead of our 2025 targets" during the conference call. Those targets, which it set back in 2019, include generating more than $3 billion in annual revenue by calendar year 2025 (which includes most of fiscal year 2026) with a non-GAAP operating margin of more than 35%.
But that bar isn't very high. To reach $3 billion in sales in fiscal 2026, Veeva merely needs to grow its annual revenue at a compound annual growth rate (CAGR) of 13% between fiscal 2022 and 2026.
Meanwhile, sticking to its 2025 forecast suggests that its non-GAAP operating margins peaked in fiscal 2022. Therefore, it would have been more bullish for Veeva to revise that forecast with much higher targets, instead of merely saying it was "tracking ahead" of those expectations.
Can Veeva's growth still support its valuations?
Veeva's growth rates are stable, but they might not justify its premium valuation metrics. Even after its post-earnings decline, Veeva's stock trades at nearly 50 times forward earnings and 16 times this year's sales.
For reference, Salesforce (CRM -0.06%) -- which is much larger but expects to grow faster than Veeva in fiscal 2023 -- trades at about 45 times forward earnings and about six times this year's sales.
If Veeva's revenue and earnings growth remain comfortably above 20% in fiscal 2023, I'd argue that its dominance of the life sciences CRM and cloud services market would justify those higher valuations. Unfortunately, its growth is decelerating, and a quick comparison to Salesforce suggests it's still a bit overvalued after its post-earnings decline.
I personally own some shares of Veeva, but I don't think it's the right time to accumulate more shares. It will likely remain out of favor until its growth stabilizes or accelerates again, and it needs to set some more ambitious long-term targets to attract growth-oriented investors in this tough market.
