What happened
Shares of Veeva Systems (VEEV -0.03%) rose 10.9% last month following a strong quarterly earnings report. The stock enjoyed momentum in the second half of March as tech stocks charged higher, spurred on by hopes that macroeconomic conditions would become more favorable for growth stocks this year.
So what
Veeva reported earnings on March 1, and investors were pleased. The company met revenue expectations but achieved better-than-expected earnings. Quarterly sales rose 16%, adjusted operating profits increased 12%, and adjusted net earnings grew 27% over the prior year. Notably, the company delivered 17% growth in subscription revenue, which has been one of its priorities. Veeva also produced over $750 million of free cash flow for the full year.
The company’s 2023 forecast calls for slowing sales growth, but investors have come to expect that in the current global macroeconomic environment. It also helped that Veeva indicated that it expects acceleration throughout 2024 as conditions improve.
The report and outlook were well-received, driving the stock about 9% higher in the first week of March. The stock was then at the mercy of market forces without any major company-specific news for the rest of the month. Major stock indexes sustained losses as investors became worried about a potential banking crisis and recession. The Fed’s decision to hike interest rates didn’t help either. Those problems were enough to wipe out Veeva’s positive earnings momentum.
Fortunately, Veeva rebounded along with the tech sector to close out the month. The Fed’s forward-looking commentary included softer language about rate hikes in the second half of 2023, and job market data supported speculation that we are nearing the highest interest rates of this cycle. Changing expectations created some optimism, especially around growth stocks. Almost all of the high-profile large-cap tech stocks rose by 10% or more in March, and Veeva benefited from this trend, building on the head start it had from quarterly earnings.
Now what
Veeva Systems has a wide economic moat as the dominant customer relationship management (CRM) and cloud enterprise management platform in the life sciences industry. Its customers are readjusting to a more normalized healthcare world after the COVID-19 disruption, but biotech and pharmaceutical companies should enjoy strong growth catalysts over the medium term. That’s good news for vendors in that industry. Veeva’s planned split from its partnership with Salesforce.com also creates interesting opportunities down the road.
For now, Veeva is a company with lots of operational promise, but the stock is fairly expensive. Its forward price-to-earnings ratio is over 40, a bit higher than we might expect with the current growth rate. That valuation implies accelerating growth in 2024 and beyond, so the company must execute on its potential to justify today’s price. In the meantime, Veeva is an interesting long-term technology play in the life sciences industry.