Are you looking for an exceptional growth stock that keeps growing in good times and bad?
The first few months of 2023 haven't been easy ones for most providers of cloud-based services, but Veeva Systems (VEEV 0.17%) recently issued guidance that was much better than Wall Street was expecting.
When a company is enjoying momentum during a difficult time for its industry, that's always encouraging, but I'm hardly the first analyst to notice this Veeva's lucrative position as the lead supplier of cloud services to businesses that operate in highly regulated life-science industries. And for potential investors, the key question is whether this growth stock is worth the risk right now.
A better-than-expected outlook
On Wednesday after the bell, Veeva Systems reported results from its fiscal first quarter, which ended on April 30. The company beat earnings expectations, but that wasn't what drove the stock 14% higher when the market opened on Thursday.
The investment bank analysts who get paid to follow the company were expecting it to earn an adjusted $4.32 per share in fiscal 2024. Many of those analysts scrambled to raise their price targets and the stock jumped because management predicted $4.59 per share in adjusted earnings for the fiscal year.
An unappetizing combination
Veeva Systems stock currently trades at around 41 times management's adjusted earnings expectation for fiscal 2024. This isn't an outrageous valuation, but it prices in strong earnings growth over the next several years.
Unfortunately, Veeva's fiscal first-quarter performance looked fairly weak, at least on the surface. Subscription service revenue rose just 3% year over year and adjusted earnings decreased 8% to $0.91 per share.
Investors should know that Veeva's fiscal first-quarter performance was pressured by a customer contracting change that went into effect in February. This pushed revenue from some customers forward. The company expects total revenue of between $2.36 billion and $2.37 billion in fiscal 2024, which would be about 10% more than fiscal 2023.
Looking further ahead
Startup biotechs use Veeva Vault applications to keep track of the reams of data thrown off by animal studies and clinical trials. Once they become established drugmakers with products to sell, they typically upgrade their subscriptions to include Veeva's customer relationship management (CRM) tools.
Veeva is in the process of moving customers from its legacy CRM tools, which were developed in partnership with Salesforce.com, to a new wholly owned service called Vault CRM. It signed 11 new small and mid-sized drugmakers up for Vault CRM in fiscal Q1. More CRM revenue coming from a platform Veeva owns outright will go a long way to boost profits in fiscal 2024 and beyond.
Veeva holds the lead position in the niche markets for life-sciences-related data management and CRM largely because it was the first to market. Soon we'll see if it can leverage its popularity to dominate the mature pharmaceutical sales data industry.
The pharmaceutical industry's leading data and analytics service provider, Iqvia Holdings (IQV -0.04%) reported $5.7 billion in technology and analytics service revenue last year. Veeva wants a piece of that action. The patient-focused segment of its data suite, Compass Patient, signed five new clients in fiscal Q1, and uptake will likely accelerate next year.
Veeva plans to release Compass Prescriber and Compass National in January. According to management, its customers will be able to use Compass Patient, Prescriber, and National to replace their Iqvia subscriptions.
Worth the risk?
Veeva's high valuation right now implies a lot of growth over the next several years. If the market finds any reason to doubt its ability to meet those expectations, investors who buy at current prices could get stuck with big losses.
Veeva's new wholly owned CRM will more than likely boost its profitability. I also think the new Veeva Compass offerings will allow it to compete fiercely with Iqvia. That said, over 40 times forward earnings is a high multiple to overcome for a company that's already as large as Veeva.
I'm not a buyer at this valuation, but I'm aware that I'll probably regret it later. For those of you at the upper end of the risk-tolerance spectrum, adding some shares of Veeva to a well-diversified portfolio looks like a smart move.
