In the Nintai Investments 2022 Annual Review, fund manager and GuruFocus contributor Thomas Macpherson wrote, “During the bear market in 2022, we used nearly every dollar of our cash reserves to add to existing holdings. Many of these were trading at compelling prices.” One of those stocks was Veeva Systems Inc. (VEEV, Financial), a company that supplies Cloud-based software to the life sciences industry.
Macpherson is not alone in liking Veeva; 10 of the Premium gurus followed by GuruFocus had stakes at the end of the third quarter according to their 13F and mutual fund reports, and institutional investors held 84.46% of the shares outstanding.
This information comes from 13F filings and mutual fund reports for the quarter in question. Investors should be aware that 13F reports and mutual fund reports do not provide a complete picture of a guru’s holdings. The 13F reports include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. The mutual fund data is sourced from the quarterly updates on the website of the fund(s) in question. This usually consists of long equity positions in U.S. and foreign stocks. However, even these limited reports can provide valuable information.
Since I really admire Macpherson's investing style, I decided to examine Veeva's fundamentals in closer detail to determine if I believe the stock is an attractive value opportunity at this time.
About Veeva
Veeva explains its business as follows in its 10-K for the fiscal year that ended on Jan. 31, 2022:
“We were founded in 2007 on the premise that industry-specific cloud solutions could best address the operating challenges and regulatory requirements of life sciences companies. Our solutions span cloud software, data, and business consulting and are designed to meet the unique needs of our customers and their most strategic business functions—from research and development (R&D) to commercialization. Our solutions help life sciences companies develop and bring products to market faster and more efficiently, market and sell more effectively, and maintain compliance with government regulations.”
In 2021, Veeva became a Delaware public benefit corporation, or PBC. As such, it pledges to deliver benefits to other stakeholders, as well as stockholders. Those other stakeholders include customers, employees, partners and communities in which it operates.
The company operates through two main segments. Veeva Commercial Cloud provides a suite of software, data and analytics solutions designed to help its clients commercialize their products. Veeva Development Cloud offers “application suites for the clinical, regulatory, quality, and safety functions of life sciences companies.” The company also offers business consulting and professional services. Its customers range from emerging growth pharma and biotech companies to giants in those same industries, plus medical devices companies.
Based in Pleasanton, California, it has a market cap of $26.51 billion and trailing 12-month revenue of $2.077 billion. Its fiscal year ends on Jan. 31.
Competitors
Veeva describes its industry as global, quickly evolving and highly competitive. In addition, the industry experiences changing regulations, advancing technology and changing customer needs.
Competitors vary by market, but include IQVIA Inc (IQV, Financial), Ipsos SA (IPS) and Dassault Systèmes SE (DSY).
The top three competitive factors listed in the 10-K are 1) the degree of customer satisfaction, 2) regulatory compliance verification and functionality and 3) domain expertise in relation to the life sciences. Veeva feels it "competes favorably" on these and other competitive factors.
That’s confirmed, in part, by its outperformance over the S&P 500 Index and the S&P 1500 Application Software Index:
In addition, its operating and net margins are industry-leading, while its gross margin and return on equity are above average for the health care providers and services industry.
Financial strength
Veeva gets a strong 8 out of 10 GuruFocus rating for financial strength, based on the following factors:
A check of the balance sheet shows no debt, but a modest amount of capital lease obligations. It also shows the company has, on a trailing 12-month basis, $8.65 billion in cash and cash equivalents. Revenue over the same time frame clocks in at $2.077 billion.
Perhaps the most inspiring line on the table above is the one that shows the weighted average cost of capital (WACC) versus the return on invested capital (ROIC). With WACC at 5.4% and a ROIC at 26.03%, this company is creating a lot of value for its shareholders.
Profitability
Veeva receives an excellent score of 10 out of 10 for profitability:
The operating margin and the net margin are industry leading, and as this chart shows, also quite consistent over the past seven years:
VEEV Data by GuruFocus
The Piotroski F-Score is 5 out of 9, which is reasonable for a fast-growing company.
Consistency is a good word to describe Veeva’s profitability growth, as this 10-year earnings per share without non-recurring items chart shows:
Data by GuruFocus
Growth
The company's GuruFocus growth rank is also a full 10 out of 10. That’s based on its three- and five-year revenue growth rates, the predictability of that growth and its five-year Ebitda growth rate:
Not only is revenue growth steadily going in the right direction, its growth rate is also exceptional at 32.53% per year:
VEEV Data by GuruFocus
Just to underline how fast it has grown, revenue for fiscal 2011 was $29 million. That grew to $61 million for fiscal 2012 and $130 million for fiscal 2013. That was revenue doubling for each of those three years, which is quite exceptional. Ebitda has a similar growth slope, as does EPS without NRI, as we saw above. There’s even more of the same for free cash flow, which has averaged 34.70% over the past three years, 37.30% per year over the past five years and 51.80% per year over the past 10 years.
Dividends and share repurchases
Veeva does not pay a dividend, and we should not expect one as long as the company is still in growth mode.
After a major buyback in 2014, the company has increased its share count every year since then. The number of shares outstanding has grown slowly and steadily, suggesting the dilution of shareholder value.
Valuation
There is a lot to like about the Veeva story, and so it should not be a surprise that it gets a ranking of just 4 out of 10 for its GF Value rank:
As the red and orange bars indicate, Veeva is expensive when compared to its peers and competitors in the health care providers and services industry.
Nevertheless, the GF Value chart considers it to be significantly undervalued. It puts the intrinsic value at $375.07, while the stock closed at $171.45 on Jan. 27, 2023. That represents a 54.28% margin of safety.
The 10-year price chart indicates the stock is trading behind its own trendline:
VEEV Data by GuruFocus
Personally, I think the company is undervalued considering its incredible growth and positive returns on its investments. Using the Rule of 72 and assuming average growth of 30% per year, then the stock price could potentially double going forward.
Conclusion
I can’t help but agree with Macpherson’s assessment of Veeva Systems. I believe this is a quality company and that it is compellingly priced.
