Veeva Systems (NYSE:VEEV) provides cloud-based software solutions for the pharmaceutical and biotechnology industries. The stock is up by almost 120% this year, as Covid-19 is expected to accelerate the process of digitization in the life sciences industry, driving demand for Veeva’s customer relationship management (CRM) and other life science-focused software tools. The stock is also up a whopping 450% since 2018. Could the stock trend higher still or is it poised for a correction?
What Has Driven Veeva Systems’ Performance In Recent Years?
Let’s take a look at Veeva Systems’ performance over the last few years for a sense of how the company has been faring and what has driven its stock price gains. Veeva’s stock price increased from $55 at the end of 2017 to around $305 currently, a dramatic increase of over 450%. The company’s Revenues grew from around $0.7 billion in FY’18 (fiscal years end January) to about $1.1 billion in FY’20 driven by the subscription revenues from the CRM solutions and the Vault content and data management tools. Net Income Margins rose from 22% to 27% over the same period with Net Income rising from about $150 million to $300 million. Veeva’s P/E ratio soared from around 51x at the end of 2017 to about 150x currently, as investors have doubled down on high-growth SaaS stocks through Covid-19. See our analysis on What Factors Drove 450% Change In Veeva Systems Inc. Class A Stock Between 2018 And Now? for more details on the stock.
Veeva’s Business Outlook Looks Solid, But Valuation Is Pricey
The global spread of Coronavirus has pushed businesses to go online, speeding up their digital transitions. This is a significant tailwind for Veeva, a leader in specialized software for mission-critical applications in the life sciences industry. While the company’s core CRM offering was its biggest revenue driver last year, the Vault product – which offers content and data management for research and development, compliance, quality assurance, and safety – offers more scope for growth. The CRM business accounted for about $469 million of the company’s subscription Revenues last year, growing at an average of 14% each year over the last two years, while Vault subscription Revenue grew by over 53% each year the last two years to $428 million. As the company’s revenue base continues to scale up with new customers and increased spends via new applications for its Vault offering, margins should also rise given that the company’s costs are largely fixed. Veeva’s revenue streams are also very sticky, considering its subscription-based model and the high switching costs associated with products focused on critical applications.
That said, Veeva’s valuation is a bit of a concern, with the stock more than doubling this year. Sure, Veeva’s business risk is relatively low, given its sticky revenue streams and profits are poised to expand, but at current prices, its valuation looks rich. The company trades at 151x FY’20 EPS up from about 69x last year. The company’s valuation is also ahead of the broader application software sector which trades at about 110x trailing earnings.
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