- Veeva offers a unique combination of growth and profitability.
- Given its healthcare focus, the stock has been resilient in the covid crisis.
- After conducting a series of valuation tests, I conclude that it is priced near fair value.
- It is an attractive name to build a defensive position in equities today, and to add significantly on pull backs.
As a defensive investment in equities, my valuation shows that it is a decent time to start a position with a long-term outlook. I believe the combination of earnings power, runway for top line growth, and segment focus make it a good choice for long-term investors.
Source: Veeva website
Veeva has demonstrated consistent earnings power and top-line growth at scale. Here is a historical view of this:
Source: Rocket Financial
Consistent 25% revenue growth coupled with a strong 20%+ net income margin (GAAP) is impressive. I have been searching for companies like this for a long-time, and there are less than a handful that can meet this financial profile.
Understandably, the stock has remained expensive, with its EV/Sales ratio slowly creeping up in the past few years. At 25x EV/LTM Sales it is not cheap, but it is also a rare company.
Rarely in the company's history has there been a big spread between analyst price target and the actual stock. This is true of many great growth stocks like Shopify (SHOP), Roku (ROKU), and Trade Desk (TTD). All of these names are upgraded after the run-up routinely, and the stock keeps catching up.
Investors' biggest worry is runway for growth. They believe that Veeva has saturated its core market in pharma and will face pricing pressure from cheaper alternatives in the market.
Recent research from William Blair shows this is not true with channel checks. As you can see below from a recent study, Veeva is viewed as best in breed in an increasing fashion across its product line.
Source: William Blair research
The strength in these ratings is greater awareness among smaller pharma/biotech companies. Veeva is now moving downstream and capturing market share without significantly increased sales and marketing. This is an impressive feat of marketing efficiency at lower deal sizes.
IQVIA and Medidata remain key competitors, but the feature set and breadth are standout features for Veeva, and I believe it will continue to be able to build out new features to differentiate its customer moat.
My internal valuation models show robust support for the stock across several methods. I can see 20% upside from current levels.
Here is a summary view:
Source: Internal models
On a revenue basis the stock is expensive, but on an earnings and EBIT and earnings basis it is cheap. There just are not many companies demonstrating GAAP profitability at this scale.
Source: Internal valuation model
Veeva is expensive and always has been. It is likely to be a volatile stock and may face short-term pressure if execution halts even momentarily. This is not a problem for long-term investors but is a consideration.
I also would monitor competitors as they start to engage in price matching and pressure on Veeva products.
Our ultimate goal as investors is to get a portion of free cash flow, and Veeva has proven that it is a profitable entity that can perform.
This article was written by
Analyst’s Disclosure: I am/we are long VEEV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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