Will Veeva Systems Stock Rebound From Its Recent Sharp Downturn?

When Veeva Systems (VEEV 1.81%) released its most recent earnings report at the end of August, the stock dropped sharply as lower-than-expected guidance confirmed investors' fears about a slowing economy impacting results. And, in the current pessimistic investing environment, there is good reason to wonder whether Veeva's stock can rebound.

Here are several reasons why Veeva's stock will bounce back over the long term.

Veeva can defend its margins

Veeva has two long-term competitive advantages surrounding its cloud business that deter larger companies from coming in and stealing market share during this downturn.

First, Veeva's founders built it from the ground up to serve the software requirements of the life sciences industry. As a result of its 15 years of learning the needs and best practices of the industry, it has built up an ample amount of intellectual property to protect its long-term profits and market share. It has stockpiled 33 U.S. patents, 11 international patents, 58 pending patents, plus a wide assortment of trade secrets, copyrights, and trademarks -- a decent-size hurdle for warding off potential competitors.

Second, the longer a company uses Veeva's cloud-based customer relationship management software or content management platform, the more costly it becomes to switch to another provider. Switching costs can come in the form of time spent getting a replacement service up and running, the direct financial costs to make a switch, the interruption of money-making activities, the risk of data loss during the migration, and many other risks. 

Many investors consider high switching costs a substantial competitive advantage that a company can use to maintain strong profit margins. For instance, an operating margin higher than 15% is considered satisfactory for most businesses. And you can see on the following chart that Veeva's operating margins have been well above satisfactory for the past five years.

VEEV Operating Margin (Quarterly) data by YCharts

In addition, Veeva generated a second-quarter fiscal 2023 net income of $90.6 million at a 17% net profit margin. Most investors consider a 10% net profit margin average and a 20% margin excellent.

Comparing Veeva's net income to many well-known cloud companies, you can see that while Veeva is profitable, most are showing a considerable loss.

VEEV Net Income (TTM) data by YCharts

Last, Veeva produced second-quarter free cash flow (FCF) of $93.4 million at a FCF margin of 17.5%. Most investors consider a FCF margin of 10% to 15% as very good.

Resistant to economic headwinds

First, about 90% of Veeva's customers are in the life sciences industry, a business where the average time to market for a new drug is 10 to 15 years from the idea stage. Because of extended development time frames, life sciences companies often have less sensitivity to poor macroeconomic conditions than many other industries.

Second, the best companies to invest in during an economic downturn are those producing vital products or services. And what is more critical than life-saving pharmaceuticals and medical technology? Since Veeva's cloud products enable drug development, manufacturing, and distribution, its cloud platform is resistant to a fall in demand.

In addition, 80% of its revenue comes from subscription services with non-cancelable subscription terms and automatic renewal. These subscriptions range from one year to multi-year, depending on the product. As a result, Veeva's subscription business provides predictable recurring revenue and helps it maintain a relatively robust valuation during lean times.

Resistant to a recession but not entirely immune

Veeva faces two significant headwinds. First, the overall life sciences industry has become slightly more conservative due to economic uncertainty. Smaller early stage companies, susceptible to having money from investors curtailed in a poor economy, have cut spending. Second, Veeva faces adverse effects on its international revenue due to the strong dollar. As a result, management lowered its full-year fiscal 2023 revenue guidance by $30 million, or about 1.5%.

However, with projected calendar year revenue of $2.140 billion to $2.145 billion, Veeva continues to track ahead of its long-term goal set at an analyst meeting in 2019 that calls for a $3 billion revenue run rate by the end of 2025 -- excellent progress against an aggressive objective.

Data source: Veeva Systems. 

Veeva is a highly valued stock at a price-to-earnings-to-growth (PEG) ratio of 2.31; it has sold below its median PEG ratio of 2.64 over the past 10 years and well below its high of 4.38. Nevertheless, the market has always valued it highly because it is one of the few cloud stocks with solid profitability and good long-term revenue growth prospects.

So if you are a long-term growth investor who can see beyond the fog of short-term uncertainty, you might consider grabbing a few shares.