A lesson from the March 2020 market crash is that stocks may fall much faster than expected. To take advantage of these opportunities, investors need to do their homework, preparing to buy big companies when short-term fluctuations in their stocks offer an attractive price.
At the top of my list for the next failure is Veeva Systems (NYSE: VEEV). The cloud software provider led by the founder has been remarkably consistent since it went public in 2013. The company continually offers new applications to further solve its customers’ problems and is now moving beyond the life sciences industry, dramatically expanding its addressable market.
Image source: Getty Images.
Solving problems for customers
Veeva Systems was founded on the idea that cloud software would become more industry specific as it matured. With two co-founders, one from Silicon Valley and the other a life science veteran, it made sense to create an app to help biotech and pharmaceutical companies market their products.
This simple idea led the company to develop many more applications grouped in two packages: Veeva Commercial Cloud and Veeva Vault. Each of these applications helps life sciences companies efficiently navigate the drug development process from end to end.
The commercial cloud combines customer data, artificial intelligence and a personalized customer experience to increase stakeholder engagement. What started out as a tool for managing customer relationships has grown to become a customer and patient data center and a set of analytical tools to plan and execute marketing and sales strategies, as well as to create and distribute content for medical analysis , legal and regulatory.
The Vault, in turn, was designed to manage content and data to streamline the workflow in regulatory, security, quality, medical and commercial tasks. The result is accelerated clinical trials thanks to centralized content, data and communications. Vault helps drug manufacturers launch and manage studies, report adverse events, comply with regulatory standards, register products and send results.
Reliable results
The consistent and impressive growth of Veeva’s customers and revenue is proof of the company’s success in creating an industry-specific product. Not only is the number of customers growing, but customer spending is also increasing every year. This is a sign that, as the company develops new applications, existing customers are eager to pay for the added features because they solve other problems. There is no reason why this strategy cannot be repeated in other sectors.
| By the end of the year on January 31 | Customers | Recipe | YOY revenue growth | Revenue per customer |
|---|---|---|---|---|
| 2020 | 861 | $ 1.1 billion | 28% | $ 1.28 million |
| 2019 | 719 | $ 860 million | 25% | $ 1.20 million |
| 2018 | 625 | $ 690 million | 25% | $ 1.10 million |
| 2017 | 517 | $ 550 million | 35% | $ 1.06 million |
| 2016 | 400 | $ 410 million | 31% | $ 1.02 million |
Data source: Veeva Systems. YOY = year after year.
When Veeva released its third quarter earnings, management offered a $ 1.45 billion guidance for the entire year ended January 31, 2021. This is an increase of 31% year on year, indicating that the 14-year-old company is accelerating its growth. And management has a plan to prevent business from slowing down anytime soon.
Expanding the addressable market
Veeva has more ways to grow than just developing new applications for its life science customers. The company recently marketed its applications to the consumer goods and cosmetics industries. Like drug developers, these highly regulated companies must bring their products to market through a rigorous testing process that requires a lot of data to track and report results.
In addition to mentioning individual gains in earnings calls, management did not disclose the number of customers or the amount of revenue generated in new sectors. He noted that the sales cycle is long and that it is difficult to beat a traditional software application. Comments like this can frustrate investors looking for the hypergrowth of new cloud software companies. But patient shareholders must see the continued penetration of a new industry as proof that Veeva can sustain its growth rate in the future.
An investment that allows you to sleep at night
Veeva Systems has an impressive growth history, thanks to its ability to introduce new applications to solve an increasing number of problems in end-to-end workflows for its life science customers. With the number of customers and the average spend per customer growing annually, it is clearly in touch with the customer’s needs.
As the company moves into similarly regulated consumer goods and cosmetics sectors, expect growth and innovation to continue and the assessment to remain stretched. Large businesses tend to have premium prices, and Veeva is no exception. The current price / sale ratio (P / S) is 34, close to the maximum of the last five years. But, over that time, the market realized the quality of the business. The lowest P / S during the March 2020 settlement was 20, double the 2016 average.
If this is any indication, this business will never again be considered cheap. Patient investors should not be too picky about the valuation during the next market settlement. Veeva Systems’ shares are likely to reward them in the long run.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even our own – helps all of us to think critically about investing and making decisions that help us become smarter, happier and wealthier.