Veeva Systems Inc (NYSE: VEEV) has seen its share price stumble by around 8% as the week draws to a close after it released its Q3 earnings. While the results showed solid growth, investors appear to have taken umbrage at the company’s fourth quarter outlook.
Is VEEV stock a good investment?
What Does Veeva Systems Do?
Veeva Systems Inc. provides cloud-based software for the pharmaceutical and life sciences industries in North America, Europe, the Asia Pacific, the Middle East, Africa and Latin America.
The company offers Veeva Commercial Cloud, a suite of software, data and analytics solutions, to life science companies. It also provides professional and support services in areas such as project management, data migration and outsourced systems administration.
The company was formerly known as Verticals onDemand, Inc. and changed its name to Veeva Systems Inc. in April 2009. Veeva Systems was incorporated in 2007 and is headquartered in Pleasanton, California.
VEEV Stock Financials
The company’s total revenues for the third quarter were $552.4m, up from $476.1m one year ago. The increase came as subscription services revenues rose by 16% to $441.6m. Professional services revenue also climbed, jumping from $95.4m to $110.8m across the same period.
While cost of revenues also climbed, jumping from $129.6m to $153.9m, operating profits still grew by 15% to $398.4m. Operational costs rose significantly though, climbing by 30% to $277.0m.
This significantly diminished the impact of the quarter’s revenue growth, though net income still grew by 2% to $108.5m.
Veeva Systems said it had cash and cash equivalents of $865.2m at the end of the period, with total current assets of $3.4bn.
Today’s adverse reaction to the company’s earnings appears to stem from its fourth quarter outlook. The company said it expected:
Total revenues between $551m and $553m.
Non-GAAP operating income of about $199m.
Non-GAAP fully diluted net income per share of approximately $1.05.
Analysts polled by FactSet had $556.9m in revenue and adjusted earnings of $1.07 a share.
The company’s share price has declined by 25% across the year to date, having hit highs of $274.29 and a low of $151.02 over the last 12 months.
The business has a price to sales ratio of 14.79 and a price to book value of 8.73. These compare with respective averages of 3.05 and 5.24 for the healthcare sector. This appears to indicate that the stock is overvalued.
VEEV Stock Growth Potential
Across the short term, the company could find major growth challenging. That’s because of the high inflation environment, which is making businesses tighten their purse strings alongside consumers.
It’s also an environment which is seeing much less action from life sciences startups. Venture capital funding hit record levels in 2021, according to Newmark, but this has slowed significantly. According to Crunchbase, the first half of the year saw biotech startup funding in H1 amounting to $16.5bn, compared to $46.9bn across the whole of 2021.
This could have an impact on the size of the market for Veeva Systems Inc to address. However, a factor strong in its favour is that the company lacks clear competitors targeting the life sciences space. There is simply no comparable business of a similar scale, allowing Veeva Systems market dominance.
It’s worth noting too that this market is expected to grow significantly. According to Grand View Research, the industry is projected to almost double from $8.3bn in 2021 to $16.3bn by 2030, at a compound annual growth rate of 7.7% from 2022 to 2030.
VEEV Stock Investment Risks
As already noted, some financial metrics indicate that the company’s stock is currently overpriced. If a business’ stock price is not backed up by its financials, the stock price is likely inflated by some other form of appeal, such as growth prospects or brand recognition.
However, the high price of these stocks can leave investors open to the risk of losing greater sums of money.
A further risk is the company’s slowing growth. While it faces very little competition in the life sciences software arena, its projected revenue growth of 16% for the current year would be its lowest since the business went public nine years ago.
However, it’s worth considering Veeva’s explanation for this, which appears to point towards general economic conditions. CFO Brent Bowman said:
“We have not seen a material worsening or improvement in the impact of the overall macroeconomic environment on customer buying behavior since our last guidance. Our guidance continues to reflect lower spending among some SMB customers and extra project scrutiny in certain enterprise opportunities that we started to see in June.”
Is VEEV Stock a Good Investment?
Some financial metrics indicate that VEEV stock is overpriced, increasing the likelihood that new investors will lose out by backing the stock. However, these metrics fail to measure the company’s potential and its lack of competition in a very lucrative space.
There are also concerns about slowing growth, but the company has few competitors and operates in a space which is expected to see rapid growth over the coming years.
If you’re willing to pay the premium, VEEV stock looks like an exciting investment with significant room for growth.
The 27 analysts covering the stock listed by the Wall Street Journal offer a consensus Overweight rating for the stock. Their average price target is $210.83.