Information technology businesses can be especially good investments when they market their products to the healthcare sector. Between their ability to scale quickly and offer tools to address the legal or regulatory walls inherent to healthcare, such companies have a huge profit potential that can often stand the test of time.
That's definitely true of Veeva Systems (VEEV -1.55%) and its end-to-end data management solutions for laboratories, hospitals, and pharmaceutical manufacturing. But there are a few things that investors should know about before taking the plunge and buying the stock, so let's go over the case for Veeva.
Growth should be easy to come by
Veeva's software platform enables life sciences companies to keep track of their data across a significant portion of the value chain, including clinical trial data and clinical operations management, manufacturing quality control, and information related to regulatory submissions. That means it's upstream in the value chain of most biopharma and medtech businesses, which in turn means that it stands to benefit from the expansion of those underlying industries.
Its services integrate everything from pre-clinical laboratory information systems to medical and commercial customer relationship management (CRM) systems under one hood for its clients, and it offers consulting services, too. The end result is that companies can start a relationship with Veeva when they are still developing their first products, and then scale more efficiently while progressively using additional data management services as needed to streamline pre-clinical research and development (R&D) work, operate clinical trials, and eventually commercialize drugs at a profit (hopefully).
That business model has proven to be successful. Over the past five years, Veeva's trailing 12-month revenue rose by 190.7%, reaching more than $1.9 billion, and net income grew by 192.2%. For 2022, the company expects to make above $1.4 billion in subscription revenue alone, and it's angling for total revenue in excess of $3 billion sometime in 2025. Since it doesn't have any similarly sized competitors or rising threats at present, there isn't too much standing in the way of hitting that target.
If that appraisal isn't bullish enough for you, consider that management calculates that the company's total addressable market is worth more than $13 billion. So, it should have plenty of room to keep growing at its current pace even if it smashes its sales expectations by 2025. And because it's a software business, its marginal costs of serving each additional customer is extremely low, so its profitability won't need to take a hit, either.
In this market, its valuation is a threat
Despite its very favorable prospects, the stock's valuation is proving to be a liability in the context of the somewhat downwardly mobile stock market of today. Its price-to-earnings ratio of 88 is more than double the healthcare services industry's average P/E multiple of 37. That means it's likely quite overpriced at the moment, even when considering its probable future success.
When the market is rising, inflated valuations aren't as scary as investors look for growth and are content to pay high prices for it. Likewise, when businesses can borrow money cheaply, higher valuations make sense because growth is easier to produce simply by borrowing money and deploying the capital at a higher rate of return than the (low) interest rate.
But in turbulent times like the present, inflated valuations are being put to the test, and especially for growth companies like Veeva. Simply put, investors are skeptical of high valuations when growth is hard to come by, and the down market has people especially skittish. That's probably part of the reason why its shares are down nearly 30% over the past 12 months, causing it to underperform the market.
Though I don't plan to buy the stock anytime soon because of the valuation risk, it could be a great addition to a moderately aggressive portfolio. Its long-term trajectory is undeniably favorable, so investors should consider a purchase if they're willing to tolerate another year or two of underperformance while the set of problematic economic and market conditions shake out.