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Why I'm Buying Shares of Veeva Systems Inc in 2016

By Brian Stoffel - Jan 15, 2016 at 10:42AM

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High insider ownership and a stellar balance sheet are nice, but it's something else entirely that puts Veeva over the top for this investor.

It takes a long time for a pharmaceutical company to bring a drug compound to market. There are preclinical trials, then FDA testing, and then the actual process of manufacturing, marketing, and distributing the drugs. Such a herculean task can take on a life of its own, and it has traditionally resulted in a mountain of difficult-to-maintain paperwork.

Enter Peter Gassner. While helping build salesforce.com (CRM 3.50%) into the behemoth it is today, he noticed that drug companies had very specific needs when it came to both the drug approval process and organizing a company's sales force to distribute a drug once it had been approved. These needs weren't being fully addressed by what salesforce.com had to offer.

So, in February of 2007, Gassner left salesforce.com to found Veeva Systems (VEEV 2.72%) -- one of the first stocks I will be adding to my portfolio in 2016. Read below to find out why.

Skin in the game matters
After reading Nassim Taleb's Antifragile, I became convinced that it was imperative to invest in companies where management had significant "skin in the game" -- or holdings of the company stock. When management is just as motivated to see a stock become a long-term winner as its shareholders are, I'm comforted by the fact that they will share in the gains -- and more importantly, the pains -- of their decisions.

Gassner owns (as of the company's May 2015 filing) 22% of Veeva's Class B shares, and he controls 19.8% of the company's voting power. That's serious skin in the game: Those shares are currently worth roughly $9.5 million.

Beyond that, I'd contend that any founder/CEO has an interest in the success of his company far beyond financial considerations. The company becomes an extension of the founder's existential self -- making its long-term viability even more meaningful.

A solid balance sheet
Many software-as-a-service (SaaS) companies go public while losing money, and they continue to burn through cash for some time after gaining a foothold on Wall Street. In an effort to gain market share, these companies invest heavily in the hopes of future earnings. While Veeva is certainly still investing in its future -- research and development spending has almost quadrupled since 2012, and SG&A spending is up by almost the same amount -- it nevertheless remains consistently profitable.

Over the past 12 months, the company has earned a profit of $0.49 per share. It has also churned out free cash flow of almost $56 million. Perhaps most importantly, Veeva currently has $400 million in cash and short-term investments on its books, while sporting absolutely no long-term debt.

But most importantly, this service is sticky
In my seven years as a Foolish contributor, I've come to realize that nothing is more important when looking for a good investment than a sustainable competitive advantage. In Veeva, I believe we have a powerful one: high switching costs.

Veeva's most popular offering is its customer service product (Veeva CRM). Once a company begins to deploy Veeva CRM to its sales force, the platform becomes a priceless tool for tracking and analyzing sales trends. Veeva recently introduced secured email as an additional service the sales force will likely use and come to rely on, on an even more regular basis. Obviously, there would be a steep learning curve for a company to deploy a new system if it decided to switch CRM providers.

Still, as sticky as this may seem, it is Veeva's "Vault" offering that I believe has truly sky-high switching costs. Veeva Vault helps companies navigate the drug approval process by storing and sharing vital information on a secure online database. This includes compliance capabilities and maintenance of electronic trial master files (eTMFs). As you might think, this is the lifeblood of many drug companies, and transitioning to Veeva requires a hefty investment in terms of employee training.

And yet, Veeva has been signing up customers in droves. In fact, during the company's most recent conference call, management said it expects revenue from Vault to more than double when full 2015 numbers are released.

Of course, salesforce.com -- or any of a number of upstart cloud companies -- could steal market share away from Veeva over time. But given these three benefits -- managers with skin in the game, a stellar balance sheet, and a robust sustainable competitive advantage -- I'm putting my money on Veeva Systems being a long-term winner.

Brian Stoffel owns shares of Veeva Systems. The Motley Fool owns shares of and recommends Veeva Systems. The Motley Fool recommends Salesforce.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Veeva Systems Inc. Stock Quote
Veeva Systems Inc.
VEEV
$228.09 (2.72%) $6.04
Salesforce, Inc. Stock Quote
Salesforce, Inc.
CRM
$188.61 (3.50%) $6.37

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