What: On Thursday, Feb. 5, Swiss megabanker UBS announced it is upgrading shares of Veeva Systems (NYSE:VEEV). According to ratings news aggregator StreetInsider.com, the banker now rates Veeva a "buy" and assigns the stock a $35 price target -- 16.7% above where the shares closed before the upgrade.
So what: Details on UBS's rationale for upgrading Veeva are sketchy, but here's what we do know. Shares of Veeva, which makes cloud-computing software for the pharmaceutical industry, are extremely volatile. Today's share price is nearly twice what Veeva sold for as recently as May 2014 -- but 20% below where shares traded in March. To hit UBS's price target, Veeva wouldn't even have to climb all the way back to that March high, when Veeva shares sold for more than $37 apiece.
Whether they're worth that much, though, is an open question. Based on Veeva's most recent numbers, as quoted on S&P Capital IQ, Veeva costs about 120 times its trailing earnings of $33 million, but "only" 68 times trailing free cash flow of $59 million. Those valuations seem a bit high.
On the plus side, analysts who follow Veeva predict stellar earnings growth at the company -- as much as 30% annually over the next five years. Plus, the company's balance sheet is rock-solid, boasting $393 million worth of cash, cash equivalents, and short-term investments -- but not a drop of long-term debt.
Now what: So, is UBS right to recommend Veeva Systems? Perhaps.
According to our Motley Fool CAPS supercomputer, where we track the performance of Wall Street's best and brightest analysts, UBS outperforms 94% of investors we track -- and gets the majority of its picks right.
UBS has an even better record in the Software sector in particular, where over the past nine years it's racked up a record of 60% accuracy, and outperformed the stock market by a combined 688 percentage points across 47 separate recommendations. That's an average of nearly 15 percentage points per pick. That's a most impressive record of success.
So, should you buy Veeva Systems? I have to admit that my thoughts are mixed. On the one hand, UBS boasts an enviable record on software picks similar to Veeva. On the other hand, the price UBS suggests you pay for this particular pick looks extremely unfavorable.
If I were a gambling man, I'd have to conclude -- yes, 60% of UBS's software picks beat the market. But there's a good chance Veeva will end up falling into the other 40% that don't.