Will Veeva Systems Stock Rebound From Its Recent Sharp Downturn?

When Veeva Systems (VEEV 1.11%) released its most recent earnings report in late August, stocks fell sharply as lower-than-expected guidance confirmed investor fears that a slowing economy would weigh on results. And, in today’s bearish investment environment, there’s good reason to wonder if Veeva shares can recover.

Here are several reasons why Veeva stock will rally in the long run.

Veeva can defend its margins

Veeva has two long-term competitive advantages around its cloud business that deter larger companies from jumping in and stealing market share during this downturn.

First, Veeva’s founders built it from the ground up to meet the software requirements of the life sciences industry. As a result of his 15 years of learning the needs and best practices of the industry, he has amassed a wealth of intellectual property to protect his long-term profits and market share. It has amassed 33 US patents, 11 international patents, 58 patents pending, plus a wide variety of trade secrets, copyrights, and trademarks, a decent-sized hurdle to ward off potential competitors.

Second, the longer a business uses Veeva’s cloud-based customer relationship management software or content management platform, the more expensive it becomes to switch to another provider. Switching costs can come in the form of time spent getting a replacement service up and running, direct financial costs to make a switch, business interruption, risk of data loss during migration, and many other risks.

Many investors view high switching costs as a substantial competitive advantage that a company can use to maintain strong profit margins. For example, a Operating margin greater than 15% is considered satisfactory for most companies. And you can see in the chart below that Veeva’s operating margins have been well above satisfactory for the last five years.

Operating Margin VEEV (Quarterly) data by YGraphics

Additionally, Veeva generated net income in the second quarter of fiscal 2023 of $90.6 million with a net profit margin of 17%. Most investors consider an average net profit margin of 10% and a margin of 20% excellent.

When you compare Veeva’s net income to many well-known cloud companies, you can see that while Veeva is profitable, most show significant loss.

VEEV Net Income Chart (TTM)

Net Income VEEV (TTM) data by YGraphics

Finally, Veeva produced second quarter free cash flow (FCF) of $93.4 million with an FCF margin of 17.5%. Most investors consider an FCF margin of 10% to 15% to be very good.

Resistant to economical headwinds

First, about 90% of Veeva’s customers are in the life sciences industry, a business where the average time to market for a new drug is 10-15 years from the stage of idea. Due to long development time frames, life sciences companies often have Less sensitive to poor macroeconomic conditions than many other industries.

second, youthe best companies invest during an economic downturn are those that produce vital products or services. And what is more critical than life-saving pharmaceuticals and medical technology? Because Veeva’s cloud products enable drug development, manufacturing and distribution, its cloud platform is resilient to a drop in demand.

Additionally, 80% of their revenue comes from subscription services with non-cancellable subscription terms and auto-renewal. These subscriptions range from one year to multiple years, depending on the product. As a result, Veeva’s subscription business provides predictable recurring revenue and helps it maintain a relatively strong valuation during tough times.

Recession resistant but not entirely immune

Veeva faces two significant headwinds. First, the life sciences industry in general has become a bit more conservative due to economic uncertainty. Smaller early-stage companies, likely to see investors’ money squeezed in a poor economy, have cut back on spending. Second, Veeva faces adverse effects on its international revenues due to the strength of the dollar. As a result, the administration lowered its revenue guidance for the full fiscal year 2023 by $30 million, or about 1.5%.

However, with projected calendar year revenue of $2.140 billion to $2.145 billion, Veeva continues to make progress on its long-term target set at an analyst meeting in 2019 calling for a $3 billion revenue run rate. million by the end of 2025: excellent progress. against an aggressive target.

Metric Results 2019 2025 goals
Revenue Execution Rate $1.1 billion $3 billion
Non-GAAP Operating Margin 37% 35%+

Data source: Veeva Systems.

Veeva is a highly valued stock with a price-earnings-growth (PEG) ratio of 2.31; it has sold below its average PEG ratio of 2.64 for the past 10 years and well below its peak of 4.38. However, it has always been highly valued by the market because it is one of the few cloud stocks with strong profitability and good prospects for long-term revenue growth.

So if you’re a long-term growth investor who can see through the fog of short-term uncertainty, you might consider buying some stocks.

Rob Starks Jr. He has positions in CrowdStrike Holdings, Inc., Okta, Snowflake Inc. and Veeva Systems. The Motley Fool has positions and recommends CrowdStrike Holdings, Inc., Datadog, Okta, Snowflake Inc., Twilio, Veeva Systems, and Zendesk. The Motley Fool has a disclosure policy.

Leave a Comment