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Veeva Systems Capitalizes on Healthcare Digitization, but Is It a Buy?

Nicholas Rossolillo, The Motley Fool

It seems that Veeva Systems (NYSE: VEEV) can do no wrong. Though the stock is up a whopping 72% so far in 2019, the party could continue after another great quarter and a rosy outlook. The company has made hay from helping pharmaceutical companies enter the digital age, but there's a lot more of the healthcare and wellness industry left to conquer.

With optimism riding high, though, investors may want to pause before making a purchase of this stock.

The quarter in review

Veeva isn't just a dominant technological force in the life-sciences business, it's simply one of the best software companies around. Heavy investment is still ongoing via both research and development (R&D) and sales and marketing, but the business is in the black and continues to reach a more profitable scale over time. This is evident in the last quarter's numbers, as a 25% gain in revenue equated to a 52% increase in adjusted earnings.

Metric

3 Months Ended April 30, 2019

3 Months Ended April 30, 2018

Change (YoY)

Revenue

$245 million

$196 million

25%

Gross profit margin

73.2%

69.2%

4.0 ppts.

Operating income

$71.2 million

$44.0 million

62%

Adjusted earnings per share

$0.50

$0.33

52%

Data source: Veeva Systems. YoY = year over year; ppts. = percentage points.

What's so impressive about Veeva's quarterly figures is that they come on top of 25% and 70% gains in revenue and adjusted earnings, respectively, during 2018. How is the company translating sales into even higher profit? As it adds customers -- and existing customers spend more with Veeva -- its services don't cost as much to operate. That shows up in the 4-percentage-point rise in gross profit margin -- which includes gross profit margin on software of 84.7%, a huge improvement from the 80.8% a year ago. Operating expenses are also not rising as fast as revenue.

Now that Veeva is solidly in the black, it can profitably invest back into itself to acquire more customers and develop new services. One such product was just launched: Vault Claims, which helps with product management from creation to marketing. The tool is designed for consumer-goods, chemicals, and cosmetics businesses, key areas of focus for Veeva outside the world of pharmaceuticals. Management also talked about progress on other recent service launches, like a new AI tool for field reps and its Clinical Data Management System.

A figure in a lab coat holds a stethoscope up to a digital icon of a person.

Image source: Getty Images.

Premium pricing, but for good reason?

Veeva's results are impressive, and management reiterated that it sees its subscription revenue continuing to grow by at least 20% through the end of the 2020 calendar year. That explains the investor optimism that has doubled the stock price in the last year. However good business has been, though, surging shares mean Veeva now trades at a premium valiuation.

As of this writing, Veeva trades at a whopping 92.7 times trailing-12-month earnings and 65.3 times forward earnings. Based on the current fiscal year's expected adjusted earnings of $2.01 to $2.03, the stock trades at a price-to-earnings ratio of 75.8. The premium pricing all goes back to the company being able to convert its solid revenue growth into 50% or higher bottom-line expansion.

However, even if profit managed the same 50% surge higher through 2020 -- and share prices remained the same over that stretch -- shares would still trade at a lofty valuation of at least 50 times adjusted earnings. Thus, it seems that many years' worth of growth are already priced into Veeva's stock at this point.

While the company has demonstrated it certainly can deliver the goods, the premium is too rich for my taste. But for investors who are looking far into the future and don't mind some hiccups along the way, a premium price tag does yield one of the best ways to bet on the digitization of healthcare and wellness.

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Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Veeva Systems. The Motley Fool has a disclosure policy.