Salesforce (CRM 0.42%) and Veeva Systems (VEEV 0.91%) are both growing cloud-based customer relationship management (CRM) service providers. Salesforce controlled 24% of the global CRM market at the end of 2021, according to IDC, which surpassed the combined shares of its four closest competitors. Veeva, which was founded by Salesforce's senior VP of technology Peter Gassner, dominates the niche market of life science CRM services for pharmaceutical and biotechnology companies.
Salesforce and Veeva were both popular growth stocks throughout the pandemic, since their business models were well-insulated from temporary business closures and supply chain disruptions. But over the past four months, both stocks have shed roughly 30% of their values as inflation, rising interest rates, and other macroeconomic shocks sparked a rotation from pricier growth stocks toward more conservative investments.
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Should investors consider buying into either beaten-down cloud stock right now? Let's take a fresh look at both companies to find out.
Salesforce's strengths and weaknesses
Salesforce is primarily known for its flagship CRM platform, but it also provides additional sales, marketing, e-commerce, analytics, data visualization, app development, and enterprise communication services.
All five of Salesforce's core businesses (sales, service, platform & other, data, and marketing & commerce) generated high double-digit revenue growth in fiscal 2022, which ended this January. Its total adjusted revenue increased 24% to $26.3 billion for the full year and its adjusted operating margin expanded 100 basis points to 18.7%, but its adjusted earnings per share (EPS) dipped 3% as it integrated its recent acquisition of Slack.
In fiscal 2023, it expects its revenue to rise 21% to about $32 billion and for its adjusted operating margin to expand to 20%. However, it expects its adjusted EPS to dip another 3% as it continues to integrate its latest acquisitions and deal with tougher currency and tax-related headwinds.
Salesforce's near-term earnings growth might remain volatile, but it still plans to generate more than $50 billion in annual revenue in fiscal 2026, which would represent a compound annual growth rate (CAGR) of at least 17.4% from fiscal 2022 to 2026. That confident forecast is supported by its current remaining performance obligations (RPO) of $22 billion, which increased 22% (24% in constant currency terms) at the end of fiscal 2022.
Veeva's strengths and weaknesses
Veeva served 1,205 customers at the end of fiscal 2022, which also ended in January, representing 21% growth from a year earlier. Its top customers include pharmaceutical giants like GlaxoSmithKline, Johnson & Johnson, and Moderna, and intense competition between those companies keeps them glued to Veeva's sticky ecosystem.
In addition to its core CRM platform, Veeva's Vault platform enables companies to store and analyze their data while keeping track of the latest clinical trials and industry regulations.
Veeva's revenue rose 26% to $1.85 billion in fiscal 2022, its adjusted operating margin expanded from 40% to 41%, and its adjusted EPS increased 27%. Those robust growth rates all reinforce the bullish notion that Veeva doesn't face any meaningful competitors and will profit from the long-term digitization of the life sciences industry.
But in fiscal 2023, Veeva expects its revenue to rise just 17% to approximately $2.17 billion, which would represent its slowest growth rate since its IPO in 2013. It expects its adjusted earnings to only grow 8%.
It mainly blames that slowdown on macro headwinds, which caused some of its customers to postpone larger projects and downsize their sales teams (which impacts its CRM business), and a higher mix of larger deals -- which take longer to recognize as revenue -- in its pipeline. Nonetheless, Veeva said it still remains ahead of its long-term target of generating more than $3 billion in annual revenue in calendar 2025, which implies its annual revenue will grow at a respectable CAGR of at least 13% between fiscal 2022 and 2026.
The valuations and verdict
Salesforce's stock trades at 43 times forward earnings and seven times this year's sales. Veeva's stock also trades at 43 times forward earnings, but it looks a bit pricier relative to its top-line growth at 14 times this year's sales.
Salesforce and Veeva are both profitable by generally accepted accounting principles (GAAP), but cloud-based software companies are still generally valued by their revenue growth until they mature and lose their momentum.
I own both of these stocks, but I believe Salesforce's stronger revenue growth, better diversification, more ambitious long-term targets, and lower price-to-sales ratio all make it a more compelling buy than Veeva right now.
