Introduction
Veeva mentioned in my book
I have discussed Veeva System (ticker: VEEV) in my books “The Rules of 10 Baggers“,
- 3-4, page 155, about medical technology information, focusing on discussions between technology giants and new software companies
Company profile
Veeva provides cloud-based customer relationship management (CRM) services, storage services, and analytics tools for life science companies. It established a first-mover advantage in this niche market, and it was serving more than 1,200 customers worldwide — including Pfizer (ticker: PFE), Johnson & Johnson (ticker: JNJ), and Moderna (ticker: MRNA) — at the end of fiscal 2022 (which ended on Jan. 31).
Business performance
Q3 2020 performance
Revenue during the quarter jumped by 16% year over year to $505.1 million. The company’s adjusted net income rose by 9% to $159.8 million. Veeva is well on its way to achieving its goal of $3 billion in revenue by 2025. But investors should see beyond this point. There are plenty more opportunities in the massive $2.2 trillion (and growing) life sciences industry.
Business in bear market
With that said, Veeva Systems’ business is still performing well. The company’s cloud-based solutions to regulatory compliance that targets the life sciences industry remain in relatively high demand. Even amid economic problems, the development of essential products such as innovative drugs and diagnostic tests continues.
Competitive situation analysis
Competive Advantages
The bullish thesis for Veeva was easy to understand. It didn’t face any meaningful competitors in its niche market, the life sciences sector was generally resistant to economic downturns, and intense competition between drugmakers would generate long-term demand for its services. And that helped them track their sales teams, store and analyze their data, and track the latest regulations and clinical trials. Veeva’s pricing power also enabled it to remain consistently profitable on a generally accepted accounting principles (GAAP) basis while other high-growth cloud companies racked up steep GAAP losses.
Continue to expand
Furthermore, Veeva Systems’ business benefits from high switching costs. For its customers, jumping ship would mean severe business disruption, since they rely on these cloud-based solutions to help them comply with stringent regulatory guidelines and bring their products to market. Veeva Systems has expanded into other highly regulated areas, including the cosmetics industry. While the company may continue to face short-term headwinds, the long-term view remains intact, and those who stick with Veeva Systems will be handsomely rewarded down the line.
Company’s mid-term goal
Veeva also still expects to generate more than $3 billion in annual revenues by calendar 2025 (which includes most of fiscal 2026), implying its top line will continue growing at a CAGR of at least 13% between fiscal 2022 and 2026.
But investors should look beyond that. There are many more opportunities in the huge $2.2 trillion life sciences industry.
Business outlook still bright
Veeva’s business model still looks promising, but its stock could continue to stagnate and underperform the market until its growth accelerates again. It’s not a bad stock to accumulate right now, since the company is arguably more resistant to a recession than many other cloud software businesses, but investors shouldn’t expect it to rebound toward its all-time high anytime soon.
Competitors
No opponents
Medidata used to be the only competitor in the market, but the scale still couldn’t compete with the Veeva system. However, Medidatato was acquired by Dassault (ticker: DASTY) for USD 5.8 billion in 2019. Although there are some competitors in the same industry, there are no relatively large competitors in the market.
Why no competitors?
The reason for this is that it is not easy to become a competitor of the Veeva system, because the Veeva system is a typical vertical type, with professional SaaS software providers in the life science and medical industries, there is no small barrier to entry.
Workaround
There are also some customers in the medical field who can only switch to other methods, such as using Oracle (ticker: ORCL) to make up and use them, or to piece together software on the market or develop their own, or to use some smaller manufacturers with better functions. Incomplete product; all in all not ideal.
Strategic partners
The Veeva system mainly has two major partners, both of which are indispensable and extremely important to the survival of the Veeva system.
Salesforce.com
Veeva’s systems are built on the Salesforce (ticker: CRM ) platform, which is also Salesforce’s preferred and recommended solution for the pharmaceutical industry. The Veeva system will pay Salesforce a small fee, so that customers of the Veeva system can use all the functions of the unlimited version of the Salesforce platform, and Salesforce’s cloud will also host data for Veeva system customers.
For deep dive on Salesforce.com, please see my previous post “How does Salesforce make money? Why is it so successful?“.
Accenture
As mentioned earlier, because the Veeva system is a typical vertical type, there are not small barriers to entry for SaaS software vendors specializing in life sciences and medical industries. Therefore, few manufacturers have the ability to assist customers to install and integrate into the client, so the Veeva system mainly relies on Accenture (US stock code: ACN) to assist customers, promote the supervision and information management of the life science industry, and promote Veeva’s system.
For deep dive on Accenture, please see my previous post “What kind of company is Accenture, the McKinsey of technology industry?“.
Stock performance
Stock performance in bear market
Veeva Systems’ performance over the trailing 12-month period substantially lags that of the market. The company partly owes this to its rich valuation metrics. Veeva’s forward price-to-earnings (P/E) ratio is 52.4, even after the beating it took over the past year. For context, the average forward P/E ratio of the healthcare industry is 15.6. Pricey-looking stocks tend to be more volatile when marketwide worries strike.
Share is consistantly expensive
However, many investors had already spotted those strengths and propelled Veeva’s stock to an all-time high of $341 last August. At its peak, Veeva had an enterprise value of $50 billion, or 27 times the revenue it would generate in fiscal 2022. But with those high valuations came great expectations — a high bar that Veeva has repeatedly failed to clear over the past year.
Veeva currently has an enterprise value of about $25 billion, which values the company at 12 times this year’s sales. By comparison, its larger CRM peer, Salesforce (CRM -1.66%), which is growing at a similar rate and facing similar macro challenges on a broader scale, trades at just five times this year’s sales. In terms of profits, Veeva trades at 40 times forward earnings, while Salesforce has a much lower forward price-to-earnings ratio of 27.
Shares return since IPO
Veeva has repeatedly impressed the bulls since its initial public offering (IPO) in late 2013. Between fiscal years 2014 and 2022, its annual revenue grew at a compound annual growth rate (CAGR) of 31%, and its adjusted net income increased at a CAGR of 46%. Its stock has generated a return of more than 800% from its IPO price of $20 a share.
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