What happened
Shares of Veeva Systems (VEEV 0.91%) climbed higher in June following a well-received quarterly earnings report. The stock enjoyed surging momentum immediately following the announcement of its financial results as investors welcomed better-than-expected results and a sufficiently bullish outlook. Veeva was able to maintain those gains over the remainder of the month, closing out the period up 19%, according to S&P Global Market Intelligence.
So what
At first glance, the news wasn't spectacular. Veeva reported 4% revenue growth, marking a significant deceleration from prior years. The company also endured a significant decline in operating income, thanks to higher costs of revenue and increases across every expense category. However, event-driven moves in the stock market are all about shifting expectations. While Veeva's results weren't particularly inspiring on their own, they still exceeded Wall Street's forecasts. Veeva's top line was higher than expected, and it also delivered impressive earnings-per-share (EPS) and cash-flow numbers.
Most importantly, the company's updated guidance was above analyst forecasts. Growth stocks can trigger significant optimism by publishing a relatively bullish outlook. Veeva is still expecting just under 10% revenue growth this year, and it's looking for an acceleration to nearly 20% growth the following year.
Image source: Getty Images.
Now what
Veeva has excellent long-term prospects, but it is subject to economic conditions with its heavy industry concentration. The company is the leading cloud service provider for the life sciences industry. It offers a customer relationship management tool, along with a suite of tools for data storage, management, and related functions. This has made Veeva an indispensable vendor for marketing, drug development, clinical trials and regulatory compliance. It completely dominates its niche.
Life sciences are a relatively high-growth industry, with biotech and pharmaceuticals leading an unending mission to address some of the biggest healthcare issues for humanity today. That should solidify demand for Veeva moving forward, which is great for sustainable revenue growth. Veeva also has an opportunity to improve its profit margin in the near future, as it plans migration from its own vendors to more cost-effective solutions.
Investors have to pay a premium for that quality. Veeva's forward P/E ratio is 44 now, which is fairly expensive, even relative to its forecast accelerated growth rate for next year. This could open the door to volatility in the next recession or market correction. Make sure that you're prepared for volatility and ready to invest for the long haul if you buy this stock.
