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Bull of the Day: Veeva Systems (VEEV)

Kevin Cook

Veeva Systems (VEEV) is a $24 billion software company dedicated to serving biopharma companies with cloud-based systems and tools for tracking and organizing clinical trials and other drug data.

 

Their primary products include a suite of cloud, IT and CRM services that make them like a dedicated Oracle-Microsoft-Salesforce triple-combo for life sciences companies from pharmaceutical and biotech to consumer and animal healthcare.

 

They also have a segment that serves Medical Devices & Diagnostics companies who face the same strict regulatory and clinical challenges in developing and marketing new products.

 

Since Veeva is focused on the special IT and regulatory needs of the life sciences, major customers including Abbott, Biogen, GSK, Eli Lilly, Merck, Novartis, Shire and Teva rely on them for Clinical, Regulatory, Quality, Safety, Medical and Commercial solutions and services.

 

In short, instead of Veeva being a cloud and IT services company for every industry, they are a trusted partner for one industry with a set of highly specialized needs. 

 

The Veeva Rocket

 

When you think of the top-performing software stocks of this year, like Okta (OKTA), Coupa (COUP), Zscaler (ZS), and MongoDB (MDB) -- all up 95% to 100% in 2019 -- you can add VEEV which made new all-time highs Tuesday near $170 and is working on a 90% return itself. 

 

I bought VEEV for my Healthcare Innovators portfolio back in March and here's what I told my members...

 

We are buying Veeva Systems (VEEV) between $115 and $120. Veeva is a $16 billion provider of cloud-based software solutions for the life sciences industry. It offers enterprise applications, a multichannel platform, customer relationship management, and content management solutions to pharmaceutical, animal health, and biotechnology companies. Also a Zacks #2 Rank after a strong beat and raise quarter with BofA/ML and SunTrust both moving their PTs to $140. 

 

Just like we bought Illumina (ILMN) for its Innovator status in serving Biotech with "space age exploration tools," we want to own a SaaS Innovator focused on Healthcare and Life Sciences. At the start of F2019, VEEV served 625 customers and employed 2,171 people. Although VEEV serves some of the largest pharmaceutical and biotechnology customers globally since its founding in 2007, no one client has accounted for >10% of revenue since going public.

 

(end of excerpt from my March 11 buy alert)

 

That part about the Zacks Rank is important because our quantitative earnings momentum indicator spotted VEEV as a winner back in early 2017 under $50. And here's a snapshot for the Zacks Institutional Research platform that shows the persistent signals investors got to still buy VEEV between $70 and $100 throughout 2018 and into this year...

 

 

Those tall green bars represent when VEEV was a Zacks #1 Rank (Strong Buy) and the smaller green bars are Zacks #2 Rank (Buy) signals.

 

Top Healthcare Buys Now, Or Not

 

On May 27 in my weekend wrapup for Healthcare Innovators I told members this...

 

My Top 5 Buys Right Now

 

Once a quarter, I like to highlight what investments members should buy or add to. I do this for the simple reasons that (1) with an average range of 20-25 ideas, it's not possible for every investor to be in all of them, (2) you may appreciate an update on where I stand and what I see as the best risk/reward opportunities, and (3) we are always getting new members every quarter via the Zacks Ultimate program and, if that's you, I like to give a place to start with a big and complicated portfolio that's trying to pick a diversity of industries in the giant 800+ company Healthcare sector.

 

After going over my Top 5, I gave 5 more strong suggestions to start or increase positions for. 

 

Coming it at #7 was Veeva Systems (VEEV): This healthcare and biotech-focused software provider is richly-valued, but then so is all of Softosphere right now. It's our only Software play in the portfolio and I'm interested to see how far it can keep running as it appears to have the momentum players on board. We may take profits near $160.

 

Unfortunately for me, I got cute right before the company's May 29 earnings report. Here was my rationale, exactly as I shared with members in my sell alert on Tuesday May 28...

 

Selling Veeva Systems Before Earnings Wednesday AMC

 

Healthcare Investor

 

Portfolio is selling Veeva Systems (VEEV).

 

First, I missed the downgrade last week from Morgan Stanley to Equal Weight ahead of earnings Wednesday.

 

Then I reviewed all the very recent price target raises to a consensus of only $146 after a terrific run this year. And while there is great news brewing in this company's command of HCare IT -- like pushing Oracle-based systems aside in Big Pharma -- I think it is well-priced for perfection (trading over 20X sales) and has risk of dropping 10%+ Wednesday on the slightest imperfection in the growth story.

 

We, and many other funds, will look to buy shares back lower if I am correct.

 

Here was the word from MS on Friday May 24...

 

Morgan Stanley downgrades Veeva to Equal Weight following year-to-date rally. Analyst Stan Zlotsky wrote in his research note that he sees limited room for continued outperformance with the stock up over 60% year-to-date. Zlotsky said while Veeva remains unique among software companies for its ability to deliver revenue growth and best-in-class profitability, and the stock has always been expensive on traditional SaaS metrics, even on a free cash flow basis the valuation is now well above the historical highs. He increased his price target on Veeva shares to $144 from $126 to reflect the recent move higher in Software-as-a-Service multiples.

 

Veeva Las Vegas: This Player Beat the House (Wall Street Banks)

 

While Wall Street analysts wrang (or sat on) their hands (and I listened to their concerns about valuation), Veeva Systems delivered the earnings trifecta of top and bottom beats and raised guidance.

 

On May 29, VEEV reported Q1 fiscal 2020 EPS of 50 cents, well ahead of the Zacks Consensus Estimate of 45 cents, delivering year-over-year growth of 61%.

 

Revenues totaled $244.8 million, outpacing the Zacks Consensus Estimate of $238.7 million. On a year-over-year basis, the top line improved 25.2%. Subscription service revenues summed $198.1 million, up 27% year over year. Per management, the solid momentum in bookings was maintained in the quarter.

 

Professional Service revenues rose to $46.6 million, almost 18% higher than the figure registered in the year-ago quarter. Outperformance by Veeva Commercial Cloud and Veeva Vault drove revenues across all segments.

 

Revenue guidance for fiscal Q2 was for $259-260 million vs. consensus expectations of just 250 million. Adjusted full-year EPS is expected within $2.01 and $2.03 vs. consensus projections for $1.94. Full year revenue guidance was given in the range of $1.045 to 1.05 billion, above the Street consensus of $1.04 billion.

 

In remarks from management, the company described how it continues to benefit from its flagship Vault Development Cloud platform for securing and accessing critical life sciences company data. 

 

“Our outperformance in Veeva Commercial Cloud and Veeva Vault allowed us to post another strong quarter of growth and profitability,” said CFO Tim Cabral. “These results enabled us to meaningfully raise fiscal 2020 guidance across all metrics.”

 

Quarter Highlights

 

Commercial Innovation Continues with New AI-driven Applications — Veeva released its new AI application, Veeva Andi, that delivers insights and next best action suggestions right in Veeva CRM. The company also announced it is embedding AI in Veeva CRM with Approved Notes and in Veeva Vault PromoMats with Auto Claims Linking.

 

Top 20 Pharma Selects Veeva Vault CDMS — The company won its first enterprise-wide deal with a top 20 pharma. The customer chose Vault CDMS as its global standard for EDC, coding, data cleaning, and reporting.

 

Industry is Moving to Veeva Vault — Veeva added 47 new Vault customers in Q1, a quarterly record. There were also a number of significant expansions with existing customers, including a top 20 pharma that standardized on Vault eTMF, Vault Submissions, and Vault Submissions Archive based upon the success of their Vault QualityDocs implementation for more than 50,000 users.

 

Analyst Reactions: Most Remain Underwhelmed

 

You would think after this quarterly report, more analysts would start to wrap their head around the idea of Veeva shares trading for over 20X sales. And at $150 per share, that's about where the company would be valued near a $20 billion market cap.

 

But over $165, that valuation gets above 23X sales. 

 

So it's pretty amazing to see the demand for shares as they made new highs today near $170 when most of the price targets barely climbed above $150 after earnings. Here's a sample of the views and moves by several i-banks...

 

Canaccord Genuity: Analyst David Hynes raised his price target on Veeva to $135 from $115 following Q1 results. He cited the signing of a record of new customers, its breadth of products, and he believes there is a long runway ahead for the company. Hynes reiterated his Buy rating on Veeva shares.

 

SunTrust: Analyst Sandy Draper raised his price target on Veeva to $150 and kept his Buy rating after its Q1 results, citing the company's record high new Vault clients on-boarded in the quarter as it tracked to surpass Commercial Solutions business. The analyst also cites Veeva's 27% subscription revenue growth in Q1 - the fastest in 5 quarters - along with its 26% increase in billings. Draper further contends that while Veeva's legacy products are still doing well, its new products like Vault CDMS saw a notable top 20 Pharma commitment with a company-wide-rollout.

 

Stephens: Analyst James Rutherford upgraded Veeva to Overweight from Equal Weight after the company's report of a very strong Q1 and the raising of its guidance for both its Commercial Cloud and Vault businesses. While he previously "couldn't get over the valuation hump," Rutherford tells investors that his new 8-year-out scenario analysis with "aggressive yet believable" market-share assumptions, lead him to increase his price target on the shares to $155 from $130 and raise his rating.

 

DA Davidson: Analyst Rishi Jaluria raised his price target on Veeva to $165 and kept his Buy rating after its strong beat-and-raise Q1 results that showed accelerating subscription growth and a record high operating margin. The analyst said the latest quarter further supports his thesis that Veeva can become a multi-billion dollar SaaS company after it signed its first top 20 CDMS customer enterprise deal, saw early adopters for its Vault Safety product, and began a Vault Claims project with a top 20 CPG customer. 

 

KeyBanc: Analyst Brent Bracelin raised his price target for Veeva to $172 from $133 on improving confidence in durable growth with a free cash flow margin above 30% as Vault momentum continues. The analyst reiterated an Overweight rating on the shares.

 

Other notable i-banks raised their PTs but remain underwhelmed...

 

Deutsche Bank: $115 to $135 Hold

 

JPMorgan: $103 to $150 Neutral

 

Barclays: $144 to $151 Equal Weight 

 

Goldman Sachs initiated coverage on June 7 with a Neutral rating. Analyst Christopher Merwin started Veeva Systems and set a $151 price target.

 

But the boldest bull on the Street is at BofA/ML and he or she is probably laughing right now. I don't have the analyst's name, nor any commentary, but on June 10 we saw a boost in their PT to $192 from $160 following the company's presentation at the Bank of America 2019 Global Technology Conference. And that view is probably what has driven the shares so strongly in the past week.

 

Veeva Innovation Rolls On

 

While most of the Street may be missing the momentum in this unique HCIT (healthcare IT) growth story, the company continues to innovate and embed themselves in the top biopharma companies in the world. To wit, a recent press release... 

 

Veeva Introduces a Single Application for End-to-End Product and Marketing Claims Management

May 21, 2019

 

New Veeva Claims provides consumer goods, chemicals, and cosmetics companies full visibility into the claims process to reduce risk and speed claims to market

 

PLEASANTON, Calif.--(BUSINESS WIRE)-- Veeva Systems (NYSE:VEEV) today introduced Veeva Claims, a new cloud application to manage marketing and product claims in industries such as consumer goods, chemicals, and cosmetics. Veeva Claims gives organizations a single unified application to manage the end-to-end claims process from creation through substantiation, approvals, and usage in marketing assets. Now legal, regulatory, marketing, and R&D teams can have a complete, up-to-date view of all claims and related assets to maintain compliance and get claims to market faster.

 

Siloed systems and manual processes are typically used to manage the claims process, including spreadsheets to record claims and email to route them through approval. This makes it difficult to find approved claims, locate substantiation, and identify marketing assets using a specific claim.

 

According to a new study by Hanover Research, Product Claims Management – the Risk and Opportunity Cost of the Status Quo, product claims management can be a challenging and costly process. “Our research shows that almost half of companies experience significant damage to their brands from a claim challenge,” said Patrick Rooney, director of research at Hanover. “Nearly every company we surveyed is looking for a solution to address this problem.”

 

(end of Veeva PR excerpt)

 

I would be a buyer of VEEV on any pullbacks under $160.

 

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