Veeva Stock: High-Quality Company at a Fair Price
Better late than never: My investment in the world's leading software specialist for the life sciences industry.
This article is an update of a writeup first published in December 2023. It has been updated and expanded following the figures for the first quarter of FY 2025.
Veeva Systems is unjustifiably under-recognised by investors. The software company has been listed on the Nasdaq stock exchange since 2013 and is considered the market leader for industry-specific cloud solutions in the pharmaceutical and biotech industries.
Veeva was founded in 2007 by former Salesforce employee Peter Gassner, among others. The IPO price of 20 USD in 2013 doubled on the very first day, and after years of rising prices, Veeva shares reached historic highs of over 330 USD in 2021. Then came the crash in the broader SaaS market. Even today, Veeva shares are trading almost 50% below their all-time high.
I personally got to know Veeva before the IPO as an excellent Enterprise Content Management system for the pharmaceutical industry. At the time, Veeva was a competitor of my own company. Unfortunately, Veeva's stock seemed far too expensive at the time of the IPO, and I never managed to get in.
Now, more than 10 years later, I see a second chance after the long consolidation phase and have acquired a position in Veeva shares for my model portfolio.
Veeva's Positioning in the Market
Veeva's total addressable market (TAM) is life sciences industry-specific software, including related data services. The company puts the size of this TAM at 20 billion USD. This does not seem particularly large compared to other software markets; Veeva's penetration is currently around 12%.
However, competition in such a vertical (industry-specific) market is much more manageable and the barriers to entry are higher than in a horizontal market, where software tools are developed independently of the needs of individual industries.
In a vertical software solution for a regulatory environment such as the pharmaceutical industry, an infinite amount of expertise is built into the software. Such solutions are very expensive to replace, and the average life of a Veeva installation is over 15 years.
The Veeva Products
Veeva generates 80% of its revenue from recurring software subscriptions. The remaining 20% comes from services, such as the complex integration and migration of its own software solutions into customer environments.
Veeva offers a range of pre-built applications based on its own cloud-based enterprise content management platform, Veeva Vault, and has successfully transformed itself into a true multi-product company in recent years.
The company's "Development Cloud" offers a wide range of solutions required for the development of new pharmaceutical and biotech products. For example, clinical trials are fully documented and monitored using Veeva products.
With the Commercial Cloud, Veeva offers industry-specific solutions for sales and marketing in the life sciences industry. This is a major disruption, as Salesforce and Adobe have been key strategic partners for Veeva. Veeva's CRM solutions, for example, are built on Salesforce's CRM technology, for which the company still pays huge OEM licensing fees to Salesforce.
They are now in the process of migrating the important CRM application to their own Veeva Vault platform. This is a mammoth task that will require major migrations for each customer, which will take place between 2025 and 2030.
Veeva is also developing its own products for marketing automation, where the company has previously relied on a partnership with Adobe.
All of these OEM partnerships continue to put pressure on Veeva's gross margin, which at 72% (GAAP) is fairly average compared to the rest of the industry. I expect the gross margin to rise towards 80% by 2030 due to the reduction in OEM fees.
The Veeva Customers
Veeva's customer base consists of more than a thousand customers in the life sciences industry. These include pharmaceutical, biotech and medical technology companies.
The top 50 customers account for two-thirds of subscription revenue. This focus on large pharmaceutical companies represents a risk due to the high concentration of customers compared to other software vendors. On the other hand, it is the logical consequence of Veeva's positioning as a key strategic software partner for the pharmaceutical and biotech industry.
More than half of the customers use at least 3 different Veeva products. The development of the customer base proves that the Land+Expand sales strategy is working well for Veeva.
Veeva's FY25 Business Figures
Veeva has always had very long-term growth plans. In 2015, with just 300 million USD in revenue, management set a goal of 1 billion USD in revenue by 2020. The first billion in revenue was achieved in 2019. Veeva then set a revenue target of 3 billion USD for calendar year 2025 (which is FY26). This is also on track.
In the short term, however, Veeva - like many other SaaS companies - is experiencing some setbacks due to the difficult economic situation. Revenues in FY24, which ended in January, came in at 2.364 billion USD, representing growth of just 10% after 16% in FY23 and 26% in FY22, meaning that Veeva's rapid growth is a thing of the past for the time being.
However, the FY24 figures include a special accounting effect from the change in revenue recognition, which will shift approximately 90 million USD of revenue into the current FY25. Growth in FY24 was reduced by approximately 4% due to this Termination for Convenience (TFC) impact. Growth in the current FY25 is therefore artificially inflated by this special effect.
In the services business, sales targets have been missed in recent quarters and have therefore had to be revised downwards. The more important subscription business was not affected by this shortfall. Nevertheless, the slowdown in the services business is putting pressure on overall growth.
For the current FY25 (including the aforementioned special effect), growth is now expected to be around 15% to over 2.7 billion USD. The recurring subscription revenue is expected to grow by 18%.
Unlike many other cloud companies, Veeva has been highly profitable for years: In FY24, the company generated operating income of 843 million USD, or a non-GAAP margin of over 35%, which is expected to grow by more than 25% to well over 1 billion USD in the current FY25.
Veeva has been generating high free cash flow margins for years, which recently rose to over 45%. The Rule-of-40 score (simply explained here) is thus around 60%, which speaks in favour of extremely efficient growth.
GAAP net margins are also above 20%, despite the high level of SBC (What You as a Shareholder Should Know About Stock-Based Compensation - SBC) customary in the industry. Dilution has recently been below 1% p.a. and is therefore not critical.
Veeva's cash position has continued to grow in recent years. The debt-free company is now sitting on almost 5 billon USD in cash, and management must be asking itself how it will deploy this capital.
I am curious because Veeva has never been known for adventurous acquisitions or aggressive share buybacks. Veeva's balance sheet is squeaky clean, with less than 500 million USD in intangible assets. This is unusual for a software company of its size.
Veeva as a Public Benefit Corporation
Veeva is proud to be different from most other publicly traded US software companies. Rather than focusing directly on shareholder value, the company's core values prioritize the success of its customers and employees, as well as the well-being of the planet and society.
Veeva is one of the first public companies to officially become a Public Benefit Corporation (PBC).
Unlike the enterprise software industry, Veeva's sales organisation is not just looking for the quick deal at the end of the quarter, but is patiently building true strategic partnerships with its customers. The CEO never tires of emphasizing that for every dollar of revenue Veeva generates, it aims to create more than two dollars of value for its customers.
I can tell you from my own experience with some Veeva employees in my circle of friends and acquaintances that this PBC theme at Veeva is actually more than just a clever marketing strategy.
Unlike most other software companies, Veeva has not undergone any major waves of redundancies or other severe cost-cutting measures after the tech boom ended in 2022, which would have strained the company's culture.
Employees attest that even as a billionaire, founder and CEO Peter Gassner has remained down-to-earth, yet visionary and extremely long-term in his thinking.
Valuation of Veeva Stock
As mentioned at the beginning, Veeva's stock is still trading 47% below the highs it reached more than 2 1/2 years ago, even though the highly profitable company has continued to deliver significant double-digit growth since then.
The key question for an investment at this point is whether Veeva has now grown into what was then an overly ambitious valuation.
In my opinion, Veeva's stock is now fairly priced, even though the stock does not look cheap at a P/E ratio of over 50 (TTM).
I prefer to look at the valuation on a cash flow multiple basis anyway, and based on that number Veeva looks much more attractive with an Enterprise Value to Free Cash Flow (EV/FCF) ratio of 21. The EV/Sales ratio is near single digits for the first time ever.
Whether you use P/E, EV/sales or EV/FCF, one thing is clear: Veeva shares have probably never been as cheap as they are today. Of course, this is also due to the fact that growth rates have declined significantly. A high-growth company has become a highly profitable company with "only" solid double-digit growth.
Conclusion
More than ten years after the IPO, I am investing in Veeva because I want to be a long-term shareholder in what is probably the most important strategic software partner in the life sciences industry. Investing in Veeva also gives me the good feeling of being part of a public benefit corporation that not only makes a lot of money, but also does a lot of good.
The key argument, however, is that I believe the company will be able to grow its cash flow by an average of around 20% p.a. over the next few years. In my investment case, I expect Veeva's share price to exceed its old highs of over 330 USD by 2030 at the latest.
If you would like to follow Veeva's progress with me, you can
*Disclaimer: The author and/or associated persons or companies own shares in Veeva. This article is an expression of opinion and does not constitute any investment or financial advice.