Shares of Veeva Systems (VEEV -0.71%) sold off after the company reported its earnings for the second fiscal quarter (which ended July 31, 2022). This drop added to the company's overall underperformance this year as shares of Veeva are now down about 33% year-to-date.
This drop came after the company lowered its guidance, but the long-term future for this software business still looks bright. The company provides software and data storage tools to the life sciences industry, helping life sciences companies with all operations -- from clinical trials to customer relationship management. Veeva might be experiencing minor short-term pain, but there are many reasons to like the company for the long term. Here are three reasons I'm still optimistic about Veeva's long-term prospects.
Image source: Getty Images.
1. Veeva's profitability remains sky high
Veeva has seen tremendous adoption of its products, and the company now expects to generate more than $2.14 billion in fiscal 2023 revenue. The majority of that comes from subscriptions that customers buy for product usage. The benefit of selling software tools through subscriptions is that it can be incredibly profitable. After all, once the tools and infrastructure are built, it's very cheap to let an additional customer use them.
Therefore, as Veeva continues to scale, its profitability steadily improved. In the full fiscal year, Veeva expects to generate $820 million in non-GAAP operating income, representing a year-over-year expansion rate of 8%. Additionally, the company anticipates fiscal 2023 operating cash flow will reach $740 million, representing an outstanding margin of 34.5%.
The company is facing short-term headwinds, primarily from small businesses that are pulling back additional spending on Veeva as a looming recession and inflation impact business budgets. This caused management to cut its full-year revenue guidance from roughly $2.175 billion to $2.145 billion. Its top line might be weaker than Wall Street was hoping, but long-term investors can remain calm knowing that the company will likely remain profitable and continue to gush cash.
2. Hiring pace continues
One of the ways Veeva is deploying this cash is by growing its sales team. The company hired 335 employees in the quarter, which could allow the company to drive innovation and long-term success. Rivals might not generate the profits that Veeva is, potentially forcing them to lay off employees or pause hiring. Therefore, Veeva is the only player ready to hire the best of the bunch at scale.
Having the best talent enables Veeva to create the best products and out-innovate the competition. That should allow the company to deliver on its long-term goals and capitalize on the lucrative opportunity ahead.
3. Short term aside, the long term looks bright
Veeva has optimistic long-term aspirations, and if it achieves them the company has the potential to be a wonderful investment. Veeva's main goal is to reach $3 billion in run-rate revenue by 2025 while maintaining a 35% non-GAAP operating income margin. Given its fiscal 2023 revenue guidance of $2.14 billion, the company expects to increase revenue by 40% over this timeframe, which is healthy growth.
The company is also eyeing a massive total addressable market worth $13 billion. Veeva might be the industry leader, but it still has enormous room to run over the long haul.
While the company might see minor impacts from small businesses spending less over the next year, Veeva's long-term potential is still strong, and its growth opportunities remain within reach.
Why I plan to own Veeva for the next decade
This drop looks like a buying opportunity for long-term shareholders. Despite the company's underwhelming guidance for the full year, it's clear that Veeva is making the right moves to position itself well for the long haul.
The primary concern for Veeva is its valuation. Even after this drop in 2022, shares aren't cheap at 37.4 times free cash flow. That said, Veeva has never been a cheap stock: Since going public in 2013, the company's average price-to-free cash flow ratio has been 62. Therefore, its current multiple is closer to its all-time low than its historical average.
Given this company's impressive profitability, excellent long-term positioning, and lucrative prospects, Veeva looks like an appealing company to own right now.
