Veeva Systems (VEEV) is a cloud-based software as a service (SaaS) company that targets the life sciences industry. The platform helps drugmakers develop drugs more efficiently, market the drugs to doctors, and maintain compliance with regulations.
Veeva has seen consistently strong top-line growth in the past decade. In 2021, revenue grew by 32.7%, with 72.1% gross margins and 25.8% profit margins.
However, the stock trades at a premium of 114.6 times earnings. As we continue to approach October, a historically volatile period for the stock market, we place a neutral rating on Veeva Systems because its high multiple may make it vulnerable to unwanted drawdowns. (See Veeva stock charts on TipRanks).
What We Like
There are a couple of things that are very interesting about Veeva. The first is that its vertically integrated, specifically for the life sciences industry. Since this is a complex and highly regulated industry, horizontally integrated (general use across multiple industries) platforms are often not good enough to be used on their own.
As a result, drug makers would likely have to mix and match different platforms, or create their own, which can be expensive. However, by specializing in this complex industry, Veeva has essentially become the go-to provider for major companies such as Eli Lilly (LLY) and Merck (MRK).
The second interesting point is how the company integrates sales and research. Companies use the platform to manage internal documents and processes related to drug development to make collaborating easier among different departments.
The internal documents that show the efficacy and other relevant trial results can be made available for salespeople to easily access when trying to sell to doctors and hospitals. This makes the sales team’s job much easier.
Growth Catalysts
Veeva operates in the healthcare IT industry which is expected to grow at a CAGR of 10.7% from 2021 to 2028. We consider this to be high growth for an entire industry that is currently worth $74.2 billion. Thus, the increasing reliance on data and software is a clear tailwind for the company.
Furthermore, since Veeva’s platform is specialized for a complex industry, it makes the cost of switching expensive. Even if a similar competitor emerges, customers of Veeva may not think it’s worth switching over, simply because of the amount of data that is already stored in Veeva’s platform.
In addition, employees would need to be retrained on the new platform, which takes away from productivity.
Risks
A potential long-term risk that we see in Veeva is that by continuing to specialize in a very specific niche within the healthcare IT industry, it may be limiting its potential for growth.
However, the company generates healthy profits and would likely have the resources to expand into complementary industries if growth were to slow down significantly.
In addition, the risk of competition is always there. Even if Veeva currently has a strong position in the market, it still needs to invest in innovation in order to stay ahead of the competition.
As we previously mentioned, customers may not want to switch over to competitors that are similar to the company. However, they will likely switch over to competitors that become significantly better.
Wall Street’s Take
Turning to Wall Street, Veeva has a Moderate Buy consensus rating, based on eight Buys, two Holds and zero Sells assigned in the last three months. The average Veeva price target of $350.13 implies 14.7% upside potential.
Final Thoughts
Veeva is a great company. However, its current multiple (even if investors believe it’s justified) does make it vulnerable to drawdowns in periods of volatility, which historically have happened around this time of the year.
Disclosure: At the time of publication, Stock Bros Research did not have a position in any of the securities mentioned in this article.
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