Veeva Systems' (VEEV 1.93%) stock dipped 4% during after-hours trading on Dec. 1, following its latest earnings report. For the third quarter of fiscal 2023, which ended on October 31, the cloud-based software company's revenue rose 16% year over year to $552.4 million, beating analysts' expectations by $6.3 million. Its adjusted net income grew 16% to $183.2 million, or $1.13 per share, also topping analysts' estimates by $0.06.
Those headline numbers looked stable, but they didn't seem to allay the persistent concerns regarding Veeva's slowing growth, exposure to macroeconomic headwinds, and premium valuation. Those issues caused Veeva's stock to shed roughly a quarter of its value this year. But could Veeva actually be a good turnaround play at these prices?
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Veeva's growth has cooled off this year
Veeva provides cloud-based customer relationship management (CRM) services, storage services, and analytics tools for life science companies. It established a first-mover advantage in this niche market, and it was serving more than 1,200 customers worldwide -- including Pfizer, Johnson & Johnson, and Moderna -- at the end of fiscal 2022 (which ended on Jan. 31).
Veeva has repeatedly impressed the bulls since its initial public offering (IPO) in late 2013. Between fiscal years 2014 and 2022, its annual revenue grew at a compound annual growth rate (CAGR) of 31%, and its adjusted net income increased at a CAGR of 46%. Its stock has generated a return of more than 800% from its IPO price of $20 a share.
The bullish thesis for Veeva was easy to understand. It didn't face any meaningful competitors in its niche market, the life sciences sector was generally resistant to economic downturns, and intense competition between drugmakers would generate long-term demand for its services. And that helped them track their sales teams, store and analyze their data, and track the latest regulations and clinical trials. Veeva's pricing power also enabled it to remain consistently profitable on a generally accepted accounting principles (GAAP) basis while other high-growth cloud companies racked up steep GAAP losses.
With great valuations come great expectations
However, many investors had already spotted those strengths and propelled Veeva's stock to an all-time high of $341 last August. At its peak, Veeva had an enterprise value of $50 billion, or 27 times the revenue it would generate in fiscal 2022. But with those high valuations came great expectations -- a high bar that Veeva has repeatedly failed to clear over the past year.
Veeva's revenue and adjusted earnings per share (EPS) rose 26% and 27%, respectively, in fiscal 2022. But at the end of the fourth quarter, management predicted revenue and adjusted EPS would only rise 17% and 8%, respectively, in fiscal 2023. At the time, it attributed that slowdown to having fewer sales representatives across the life sciences market as companies reined in their spending.
But after several adjustments over the past three quarters, Veeva now expects its revenue and adjusted EPS to rise 16% and 12%, respectively, for the full year. It attributes that slower sales growth to sales rep reductions, larger research and development (R&D) deals that take longer to book as revenues, macro headwinds driving some of its clients to postpone pricier projects, and a strong dollar.
In other words, Veeva wasn't as well insulated from the macroeconomic headwinds as some investors might have initially thought.
On the bright side, Veeva's adjusted subscription gross margin still expanded 30 basis points year over year to 85.8% in the first nine months of fiscal 2023 -- indicating it maintains plenty of pricing power in this tough market. Veeva also still expects to generate more than $3 billion in annual revenues by calendar 2025 (which includes most of fiscal 2026), implying its top line will continue growing at a CAGR of at least 13% between fiscal 2022 and 2026.
Is Veeva's stock finally worth buying?
Veeva currently has an enterprise value of about $25 billion, which values the company at 12 times this year's sales. By comparison, its larger CRM peer, Salesforce (CRM -0.22%), which is growing at a similar rate and facing similar macro challenges on a broader scale, trades at just five times this year's sales. In terms of profits, Veeva trades at 40 times forward earnings, while Salesforce has a much lower forward price-to-earnings ratio of 27.
Based on these comparisons, Veeva's stock isn't a screaming bargain yet. Investors still seem to be paying a premium for its dominance of the life science CRM market, but the company could lose its luster if it continues to deliver low to mid-teens revenue and earnings growth over the next few years.
Veeva's business model still looks promising, but its stock could continue to stagnate and underperform the market until its growth accelerates again. It's not a bad stock to accumulate right now, since the company is arguably more resistant to a recession than many other cloud software businesses, but investors shouldn't expect it to rebound toward its all-time high anytime soon.
