Is It Too Late to Buy Veeva Systems Stock?

Veeva Systems' (VEEV 0.91%) stock price jumped 8% on Aug. 31 after the cloud software specialist posted its latest earnings report. For the second quarter of fiscal 2024, which ended on July 31, its revenue grew 10% year over year to $590 million and exceeded analysts' estimates by $8 million. Its adjusted EPS rose 17% to $1.21 and cleared the consensus forecast by $0.08 per share.

Those headline numbers were impressive, but is it too late to hop aboard the bullish bandwagon after Veeva's year-to-date rally of nearly 30%? Let's review its business model, growth rates, and valuation to decide.

Image source: Getty Images.

What happened to Veeva over the past few years?

Veeva provides cloud-based customer relationship management (CRM), data storage, and analytics services for life sciences companies. It established a first-mover advantage in this niche market, and its growing list of more than 1,200 customers includes pharmaceutical giants like Pfizer and Johnson & Johnson.

Veeva doesn't face any meaningful competitors in its niche market, and intense competition among its life science clients has fueled its growth since its public debut nearly 10 years ago. Its growth also stayed consistent during and after the pandemic: Revenue rose 28% in fiscal 2020 (which ended in January 2020), 33% in fiscal 2021, and 26% in fiscal 2022.

But in fiscal 2023, Veeva's revenue only climbed 16% as macro headwinds forced many of its clients to downsize their sales teams and rein in their spending on new projects. Smaller biotech companies also struggled to raise fresh funds, take on new projects, and expand. That slowdown intensified in the first quarter of fiscal 2024; Veeva's revenue rose a mere 4%.

Accelerating growth with sequentially expanding margins

But in Q2 of fiscal 2024, Veeva's revenue growth accelerated again as its adjusted gross and operating margins both expanded sequentially.

Data source: Veeva Systems. YOY = year over year.

It expects that recovery to continue in the third quarter, with 11%-12% year-over-year revenue growth and an adjusted operating margin of 36%-37%. For the full year, it forecasts revenue will rise 10% with an adjusted operating margin of 35%.

During Veeva's conference call, CFO Brent Bowman said that stable outlook assumes the current "macro environment will continue," but that the company also doesn't expect the situation to "get better" or "get worse." That neutral statement, along with its stable outlook for the rest of the year, suggests it's finally near the trough of its cyclical downturn.

Veeva also reiterated its guidance for generating at least $2.8 billion in revenue, with an adjusted operating margin of about 36% in fiscal 2025. That would represent 18% revenue growth from its forecast for fiscal 2024.

But the stock isn't a screaming bargain

Veeva expects its adjusted EPS to rise 12% year over year in the third quarter and 9% for the full year. But at $210 per share, Veeva already trades at 45 times this year's adjusted EPS. In comparison, cloud-based CRM giant Salesforce -- which expects to generate 53%-54% adjusted EPS growth this year -- trades at 27 times that estimate.

That high valuation will likely limit Veeva's upside potential and make it a less compelling cloud play than Salesforce and its other industry peers. But if the macro environment warms up and life sciences companies ramp up their R&D and marketing spending again, we could see a lot of that cash flow to Veeva's platform and boost its revenue.

I don't think it's too late to buy Veeva as a long-term investment. However, investors should only nibble on the stock at these levels and be aware that another market downturn could easily compress its valuation to more attractive levels.