Veeva Systems Stock (NYSE:VEEV): Quality Comes at a Hefty Price
Stock Analysis & Ideas

Veeva Systems Stock (NYSE:VEEV): Quality Comes at a Hefty Price

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Veeva’s unique business model has facilitated rapid, sustained growth for the company. While its positive momentum will likely last, investors should exercise caution as the stock’s valuation appears rich.

Veeva Systems (NYSE:VEEV) is a high-quality SaaS (software-as-a-service) stock with a distinct edge over its tech peers due to its focused approach to serving companies operating in the life science industries. Precisely because of its unique characteristics and market-leading position, the company boasts a robust track record of continued success, which is likely to persist, moving forward.

That said, even though VEEV stock has lost about half of its value from its all-time-highs back in April of 2021, the current market environment suggests that the stock remains relatively pricey, which may be a headwind to its future returns. Accordingly, I am neutral on VEEV stock.

How’s Veeva’s Business Model Able to Drive Consistent Success?

Veeva Systems has a truly distinctive business model, which has enabled the company to achieve consistent success. Specifically, as far back as I can trace from the company’s public data, Veeva has managed to grow its revenues every single quarter since Q1 2012. It translates to 43 consecutive quarters of growing revenues. This impressive track record includes a compound annual revenue growth rate of 32.5% over the past decade, also underscoring the company’s outstanding performance.

This success can be attributed to the attractive characteristics of its business model, with no other company featuring a similar blend of traits. Let’s break them down!

Attractive Trait #1: A Targeted Niche

Veeva’s success is largely thanks to its advantageous business model, which concentrates on a specific target niche. In simple terms, the company specializes in cloud-based software solutions, specifically catering to the customer relationship management (CRM), regulatory compliance, and clinical data management needs of life science companies. These companies usually operate in the pharmaceutical, biotech, and medical device sub-industries.

By focusing on this niche market, Veeva has been able to acquire an in-depth understanding of its customers’ distinct requirements and obstacles, resulting in custom-tailored solutions. Following this strategy has propelled Veeva to the forefront of the healthcare CRM space, and its strong brand reputation bodes well for continued success.

Attractive Trait #2: Recurring Revenues

Veeva relies heavily on its subscription-based business model, which delivers stable and predictable revenues to the company. In Fiscal 2023, for instance, its subscription-based revenues accounted for 80.4% of total revenues. This model’s advantages are highlighted by the fact that Veeva has never experienced a sequential decline in quarterly revenues, as I previously mentioned.

Further, this model is great as it provides Veeva with a predictable stream of cash flows which allows it to invest in R&D and other growth initiatives with little uncertainty. This benefit also contributes to its market-leading position.

Attractive Trait #3: High Switching Costs

Another significant characteristic that contributes to Veeva’s continued success is the high switching costs bound to its SaaS solutions.

If you think about it for a second, for a life sciences company to switch from Veeva’s platform, it would need to train its employees to use the new software, which would take time and resources. On top of that, the company would need to migrate its data from Veeva Systems’ platform to the new platform, which would be a complex and time-consuming process.

In other industries, this could be an easier task, but not in life sciences. This is because Veeva’s software is mission-critical for the day-to-day operations of its customers.

In addition, Veeva’s clientele would have to verify the compatibility of any new software with their current systems and procedures, presenting a formidable obstacle. These elements together form a potent deterrent for rivals, bolstering Veeva Systems’ position as the market leader.

Attractive Trait #4: Vertical integration

Lastly, another noteworthy aspect of Veeva’s business model is its exceptional compatibility with vertical integrations. Veeva offers a suite of integrated products that cover the entire value chain of its customers, from research and development to commercialization.

Besides this allowing the company to provide comprehensive solutions that are difficult for competitors to replicate, it also gives it multiple opportunities to upsell additional solutions to its customer cohort. Consequently, Veeva can expand its revenues at a faster rate than customer growth, as clients typically increase their spending over time.

How Do Veeva’s Growth Prospects Look?

As mentioned earlier, Veeva’s growth track record has been very impressive throughout its life, especially the rate of its revenue growth over the past decade. However, as corporate spending has been suppressed lately following a tough macro environment, Veeva has also experienced a notable deceleration in its growth. In Fiscal 2023, revenues grew by about 16%, notably lower than its historical average.

Further, management’s guidance for Fiscal 2024 targets revenue growth of 15%, implying more deceleration. But here’s where things get interesting: management has also guided for Fiscal 2025 revenues of at least $2.8 billion, which suggests a minimum of 19% growth for that year.

The rebound in Veeva’s growth rates is likely attributable to expectations of corporate spending rebounding in the medium term, as well as the company expecting to launch new solutions that it can upsell to its customers.

Is VEEV Stock a Buy, According to Analysts?

Regarding Wall Street’s view on Veeva Systems, the stock has a Moderate Buy consensus rating based on 14 Buys and eight Holds assigned in the past three months. At $196.40, the average Veeva Systems stock forecast suggests 9.8% upside potential.

The Takeaway: Is Veeva Overvalued?

Based on management’s outlook, Wall Street estimates point to Fiscal 2024 earnings-per-share of $4.31. This implies that shares of Veeva are currently trading at a forward P/E of about 41. While analysts also expect a strong increase of about 20% in earnings per share for the year after (Fiscal 2025), I believe that the stock is still expensive, especially given where interest rates are currently hovering.

It appears that investors are willing to pay a hefty multiple for the stock due to the company’s unique qualities, which, as noted, offer Veeva multiple performance benefits. That said, I suggest that you be careful about holding the stock at its current price levels, as the possibility of a valuation compression to a more reasonable multiple could negatively impact its future returns.


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