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Forget Cerner: Veeva Systems Is a Better Buy

Money with arrows pointing out in different directions

Cerner (NASDAQ: CERN) has been a wonderful investment. Shares of the healthcare-focused information technology provider are up more than 80-fold since the company's IPO in the early 1990s. That's a return that thrashes the S&P 500 .

Cerner might still be a great company, but its growth rate has slowed considerably in recent years . As a growth investor at heart, I'm convinced that Veeva Systems (NYSE: VEEV) is the better choice for new money. Here's why.

Money with arrows pointing out in different directions

Image source: Getty Images.

The business

Veeva is a software-as-a-service (SaaS) provider that primarily focuses on the needs of the life sciences industry. The company offers two main product lines:

  • Commercial cloud: This segment is a customer relationship management (CRM) platform that helps pharma and biotech companies to better manage their marketing and sales needs.
  • Veeva Vault: This software helps life sciences companies to navigate the difficult regulatory approval process. Vault helps clients with functions like data storage, clinical trial management, and data capture.

Both of these products have been huge hits with customers and have grown like wildfire since they were launched. Veeva also chooses to spend lavishly on research and development in an effort to add new functionality to these product lines. That helps the company to pull in more revenue from its existing customers while simultaneously raising switching costs. That's a double win for investors, and it helps to create a strong economic moat .

Expanding horizons

Veeva has been hugely successful in penetrating the life sciences industry, but management has bigger ambitions. It firmly believes that Veeva's product lines can find uses in other industries as well.

Veeva created a new business segment called Vault QualityOne that is designed to attract companies outside its core market. The company is placing an initial emphasis on industries that are highly regulated and also have health and safety concerns. This means that chemical makers, consumer packaged goods (CPG) companies, and cosmetics companies are a natural hunting ground.

It is still the early days for Vault QualityOne, but the company has already had some success. Veeva has already signed deals with a handful of companies in the CPG and cosmetics space.

How big could the market be for Veeva's latest venture? Management put the number at $1 billion , but that estimate could prove extremely conservative. Even if it is accurate, that's still a decent number for a company that is expected to produce about $850 million in total revenue for the year ahead.

Sparkling financials

The beauty of the SaaS business model for investors is that operating leverage starts to kick in after a company has reached enough scale. That can lead to outsized growth in the bottom line.

A look back at Veeva's revenue and net income growth over the last few years clearly shows that operating leverage has already manifested itself .

VEEV Revenue (TTM) data by YCharts.

Veeva's balance sheet is also in top shape. The company ended 2018 with $1.1 billion in cash and $0 in long-term debt. You can't ask for much more than that.

So what kind of growth can investors expect? Wall Street is predicting that the bottom line will expand by 25% annually over the next five years. That's a number that I think will be conservative if Vault QualityOne is a smashing success.

Veeva Systems is a buy

The only knock that I have against Veeva is that Wall Street is pricing this business for substantial growth. Shares are currently trading for more than 66 times next year's earnings estimates and for nearly 20 times sales . Those are nosebleed valuations for sure.

However, since Veeva is growing fast, has a strong competitive position, sports sparkling financial statements, and has numerous opportunities for growth, I think that this is a stock that stands an excellent chance of delivering market-beating returns from here.

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Brian Feroldi has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Veeva Systems. The Motley Fool recommends Cerner. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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