Shares of Veeva Systems (VEEV -0.71%) tumbled 11% during after-hours trading on Aug. 31 following the release of its second-quarter earnings report. The cloud-based software company's revenue rose 17% year over year to $534.2 million, which beat analysts' estimates by $3.5 million. Its adjusted net income rose 9% to $166.2 million, or $1.03 per share, which also topped the consensus forecast by $0.02.
Those headline numbers look solid, but Veeva now expects its revenue to rise just 16% for the full year, compared to its prior forecast for 17% to 18% growth. That guidance cut clearly spooked the bulls, but was Veeva's post-earnings plunge justified?
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Why is Veeva's growth cooling off?
Veeva provides cloud-based CRM (customer relationship management), storage, and analytics services for life science companies. It served 1,205 customers at the end of fiscal 2022, which ended this January, including pharmaceutical giants like Pfizer, Johnson & Johnson, and Moderna.
Veeva enjoys a first-mover advantage in this niche market. It doesn't face any meaningful competition, and intense competition across the life sciences market has been driving its long-term growth. Between fiscal 2014 and 2022, its annual revenue rose from $210 million to $1.85 billion, representing a compound annual growth rate (CAGR) of 31%.
However, its forecast for 16% revenue growth this year would represent a significant deceleration from its 26% growth in fiscal 2022, and it would represent its slowest growth since its initial public offering in 2013. It blames that slowdown on larger research and development deals that will take longer to recognize as revenue; the downsizing of sales teams across the life sciences sector, which impacts the CRM market; macroeconomic challenges for large-scale life science projects, and currency headwinds from a strong dollar.
Veeva is sticking with its long-term target of generating more than $3 billion in annual revenue by calendar 2025 (which includes most of fiscal 2026), but it would only need to grow its top line at a CAGR of at least 13% between fiscal 2022 and 2026 to achieve that goal.
Contracting margins and slowing earnings growth
As Veeva's growth cools off, its margins are contracting. In the first half of fiscal 2023, its adjusted gross margin fell 80 basis points year over year to 74.8%, while its adjusted operating margin dropped 340 basis points to 38.6%. For the full year, it expects its operating margin to slide about 270 basis points to a three-year low of 38.3%.
It expects its adjusted earnings per share (EPS) to grow just 12% for the full year, which would also represent its slowest growth since its IPO. But on the bright side, Veeva remains firmly profitable by both GAAP (generally accepted accounting principles) and non-GAAP measures -- which makes it more appealing than higher-growth cloud software stocks that still can't generate consistent GAAP profits yet.
It was also still sitting on $1.14 billion in cash and equivalents along with $1.78 billion in short-term investments at the end of the second quarter, and its low debt-to-equity ratio of 0.3 gives it plenty of room to raise fresh cash.
A high valuation and a lack of insider interest
Veeva's business still looks stable. But at $180 per share, it trades at 43 times this year's adjusted EPS estimate and 13 times this year's sales. Those valuations are simply too rich relative to its near-term growth and its comparable industry peers. For example, Salesforce (CRM -1.10%), the cloud-based CRM leader that hosts some of Veeva's services, expects to grow faster than Veeva this year but trades at just 34 times forward earnings and five times this year's sales.
Veeva's insiders also aren't eager to buy at these levels. Over the past three months, they haven't bought a single share of the stock -- even after it advanced nearly 20% during that period (excluding its post-earnings drop).
It's not the right time to buy Veeva
I personally have a position in Veeva, and I'm not planning to sell my shares anytime soon. However, I don't think it's the right time to start a new position or add more shares right now. Its stock could easily be cut in half in this rough market for imperfect growth stocks, and it lacks any near-term catalysts to cushion that fall.
