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Does Veeva Systems Still Have Room to Run?

Leo Sun, The Motley Fool

Shares of Veeva Systems (NYSE: VEEV) surged about 80% over the past 12 months as the cloud services provider defied the bears with a streak of impressive earnings beats featuring double-digit sales and earnings growth. Its recent first-quarter report, which featured 25% year-over-year sales growth with a 53% jump in adjusted earnings, showcased that strength.

However, investors might be wondering if Veeva, which trades at over 60 times forward earnings, still has room to run. Let's dig deeper into the company's growth story to find out.

A network of cloud computing connections.

Image source: Getty Images.

A leader of a high-growth niche

Veeva's cloud services help drug companies manage customer relationships and track industry regulations, clinical trials, prescribing habits, and other data. Intense competition between drug companies boosts demand for that real-time data, and major pharmaceutical companies like GSK, AstraZeneca, and Novartis are already locked into its ecosystem of over 750 customers.

Veeva has a close relationship with Salesforce (NYSE: CRM). It was co-founded by former Salesforce SVP of Technology Peter Gassner, its CRM (customer relationship management) platform is powered by the Salesforce1 app development platform, and its other services are integrated into Salesforce's Marketing and Service Clouds.

Veeva is constantly expanding its ecosystem with new features, which include the Veeva Nitro data warehouse, employee training tools in Veeva Vault, the Veeva CRM Sunrise UI (which lets employees access its platform across multiple devices), and Veeva Andi, a new AI application that crunches and analyzes its CRM data. Cross-selling these services boosts Veeva's higher-margin subscription revenue and widens its moat against potential challengers.

A scientist holds up a pill.

Image source: Getty Images.

How fast is Veeva growing?

Veeva's dominance of its niche, sizzling demand from life science customers, and its expanding ecosystem enabled it to dazzle investors with impressive top and bottom line growth over the past year.

YOY growth

Q1 2019

Q2 2019

Q3 2019

Q4 2019

Q1 2020

Revenue

22%

25%

27%

25%

25%

Operating income*

21%

39%

45%

53%

49%

Net income*

50%

68%

81%

88%

53%

Source: Veeva Systems quarterly reports. *Non-GAAP basis.

During the first quarter Veeva's subscription revenue rose 27% annually and accounted for 81% of its top line -- compared to 80% a year ago. The non-GAAP gross margin of those subscription services also rose from 81.6% to 85.2%.

Veeva's "professional services and other" revenue, which accounted for the rest of its sales, rose 18%. The non-GAAP gross margin of that unit also expanded from 29.4% to 31.1%.

Veeva's total non-GAAP gross margin expanded from 71.1% to 74.9%, and its non-GAAP operating margin operating margin rose from 32.2% to 38.2%. Veeva's expanding margins are rare in the cloud services industry, where companies often sacrifice margins to gain market share. However, its first-mover's advantage in its niche gives it plenty of pricing power and room to cross-sell new services.

But does Veeva deserve a premium valuation?

For the second quarter, Veeva expects its revenue to rise 24% annually, its non-GAAP operating income to rise 27%-28%, and its non-GAAP EPS to grow 23%-26%.

Veeva expects its revenue to rise 21%-22% next year. It didn't provide any earnings guidance, but Wall Street anticipates 18% growth this year and 15% growth next year. Those growth rates are solid, but they don't seem to justify a forward P/E in the low 60s. For comparison, Salesforce trades at 45 times forward earnings, and Wall Street expects a 2% earnings drop this year followed by 28% growth next year.

I believe that investors are paying a premium for Veeva for two simple reasons: The cloud services sector is largely unaffected by the trade war and tariffs, and the company doesn't face much direct competition in its high-growth niche. Those factors could help Veeva rally further, but its high valuation could cause it to give up its gains quickly in a steeper market sell-off -- so investors might want to wait for a bigger pullback before starting a position.

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Leo Sun owns shares of GlaxoSmithKline. The Motley Fool owns shares of and recommends Salesforce.com and Veeva Systems. The Motley Fool has a disclosure policy.