Veeva Systems (VEEV 0.91%) offers cloud-based software solutions worldwide for the life sciences industry. Its products help pharmaceutical, biotech, and medical device companies manage clinical trials, regulatory compliance, sales, and marketing. Many analysts generally consider the pharmaceutical industry resistant to a slow-growth economy, because the demand for healthcare products and services stays mostly the same in the face of changing economic conditions.
However, it turns out Veeva was far from immune to the economic uncertainty in 2022. Plagued by high inflation, rising interest rates, and the war in Ukraine, the stock dropped 37% during the year as investors were concerned over falling revenue growth and a shrinking operating margin.
The stock continued to disappoint in 2023 until the company delivered its fiscal 2024 first-quarter results on May 31, 2023. Veeva beat analysts' revenue and earnings expectations for the quarter and raised revenue and earnings guidance for the full fiscal year. The stock surged 20% immediately following the earnings release, and it's now up 24% year to date.
But Veeva's rally may not be over yet -- here's why you should consider putting it on your buy list in 2023.
It has multiple long-term growth drivers
Veeva Systems has multiple long-term growth drivers working in its favor. First, it has a strong product portfolio that addresses the many needs of its clients, including some of the world's largest pharmaceutical and life sciences companies: Pfizer, Johnson & Johnson, and Merck, just to name a few. Veeva's products help these companies manage their data, processes, and relationships more effectively, enabling them to introduce new drugs to the market faster and more efficiently.
Second, cloud-based software is becoming increasingly popular in the life sciences industry, because it is more scalable and easier to use than traditional on-premises software. Researchers can access the cloud from anywhere, which is vital for scientists collaborating with colleagues worldwide. Veeva can also easily update cloud-based software so scientists always have access to the latest features and bug fixes. Additionally, Veeva can often offer a more affordable solution than traditional on-premises software since businesses pay only for the resources they use.
Third, analysts expect the pharmaceutical industry to grow at a compound annual growth rate (CAGR) of 3% to 6% over the next five years. Many factors drive this growth, including the aging population, the increase in chronic diseases, and the advancement of new technologies.
The life sciences industry's growth helps Veeva by increasing overall demand for its cloud-based software. As the industry grows, so does the need for its services.
A slowing economy can hurt its growth
In the past 10 years, the pharmaceutical industry has changed its approach. Previously, big companies conducted massive, expensive searches for blockbuster drugs on their own. Nowadays, it is common to see large pharmaceutical companies financially supporting the research and development efforts of smaller biotechs. And whenever that collaborative effort identifies a suitable drug candidate, the large pharma companies will provide the resources to sell and market these innovative new drugs.
Drug development often thrives in a healthy funding environment for young, innovative biotech companies. However, during economic downturns, such funding can quickly dry up. Additionally, smaller biotechs can have difficulty attracting and retaining top talent during a slow economy.
So when an economic slowdown takes its toll on smaller biotechs, growth in the overall pharmaceutical industry can take a hit more than it might have 10 or 20 years ago.
The following chart shows that Veeva's year-over-year quarterly revenue growth has slowed meaningfully over the last year, dragging its share price down in the process.
Data by YCharts.
Why the stock is buy
Fortunately, what we're seeing is a natural result of the economic cycle, and the impending upturn should alleviate much of the company's growth problems. Rising investment in small biotechns should lead to an eventual rise in drug development initiatives. As many of these companies use Veeva's cloud products to manage their drug discovery processes, usage of its cloud products should increase as well.
Long term, the declines Veeva has seen in its operating margin should also reverse.
Data by YCharts.
Falling from its historical range between 20% and 30% to less than 12% in the most recent quarter looks terrible on the surface.
However, the company announced in Dec. 2022 that it will be transitioning its Veeva CRM product from Salesforce to its own Veeva Vault Platform beginning in 2025. This move should eventually eliminate expenses related to licensing, maintenance fees, and hosting costs currently paid to Salesforce.
In addition to the cost savings, management believes moving off Salesforce will give it more control over its destiny. By using its own platform specifically designed for the life sciences industry, Veeva could gain a competitive advantage in the market.
But Veeva's revenue and operating margin will take a hit this fiscal year due to Termination for Convenience (TFC), which allows customers to cancel their contracts with Veeva anytime. In Febr. 2023, Veeva started standardizing its customer contracts to include TFC. Management projects this change will hurt revenue and operating margins by approximately $95 million in fiscal 2024 before those metrics normalize in fiscal 2025.
In that light, Veeva's price-to-sales (P/S) ratio of 14.9 is high in absolute terms, but it remains below the three-year median, so Veeva is currently trading at a discount to its historical levels.
Data by YCharts.
If you believe the economy will hold strong or enter a new phase of expansion in the coming year, this could be an excellent time to buy this leading provider of cloud-based software solutions for the life sciences industry.
