Since the central bank started hiking interest rates, the stock market hasn't been kind to most companies with nosebleed valuations. This is because institutional investors have pivoted away from high-growth opportunities, many of which were fueled by ultra-low interest rates, and into more traditional value plays like blue chip dividend stocks.
This trend reversal has hit numerous healthcare stocks particularly hard. Over the course of 2009 to 2021, investors poured money into cutting-edge healthcare companies with the belief that the aging global population, an ongoing innovation boom, and a favorable regulatory landscape would drive a marketwide boom in profits. And to be fair, this bullish thesis did indeed pan out in many instances.
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The life sciences cloud-based software solutions company Veeva Systems (VEEV +0.34%) is a prime example of this trend line. The company's decision to build out specialized customer and content management systems for biotech, biopharma, and medtech companies proved to be a smash hit with its customer base. As a result, Veeva's annual sales skyrocketed by an astonishing 235% over the past six years, driving the software company's share price up by over 600% at its peak.
Veeva, however, hasn't been able to escape the bearish trend among high-flying growth stocks. To wit: The company's shares have sunk by nearly 30% over the prior 15 months. Even so, Veeva's shares are still trading at a hefty 43 times forward earnings.
Does Veeva stock deserve this rich premium in the current economic environment? Let's dig deeper to find out.
Veeva: A wide economic moat and a long growth runway
Veeva earns money through two operating segments: commercial solutions and research/development solutions. Its commercial solutions segment helps life sciences companies improve the efficiency of sales teams handling marketed products. Veeva's R&D solutions platform (Veeva Vault), on the other hand, enables companies to keep track of regulatory documents, clinical trial data, quality and manufacturing, and safety data.
Veeva's two core platforms play a crucial role in the everyday operations of a wide variety of life sciences companies. As such, its customers face enormous switching costs due to the pivotal nature of these content and customer management platforms.
NYSE: VEEV
Key Data Points
Long story short, it's next to impossible to migrate scores of clinical trial documents, regulatory filings, etc. to another platform in the midst of an ongoing development program or commercial launch. To do so, a company would have to be willing to incur a major delay, which is simply unacceptable from the viewpoint of most stakeholders. Biopharma and medtech, after all, are fiercely competitive industries, where being first to market is of primary importance.
In turn, Veeva sports a wide economic moat due to these favorable dynamics. Equally important, Veeva Vault has essentially become the gold standard within the pharmaceutical industry for managing various types of data and regulatory filings. These two key factors are expected to help the company exceed $2.3 billion in sales in fiscal year 2024 and $2.8 billion in sales by fiscal year 2025.
So what's the verdict?
Veeva's competitive moat is only expected to grow in the years ahead, along with its highly dependable revenue stream. Consequently, this stock arguably does deserve a premium valuation, even in a bearish market.
