Veeva (NYSE:VEEV) has seen its multiple compresses, and together with the rest of its SaaS peers, shareholders have seen Veeva’s share price come down by nearly 50% in the past year.
Looking back, Veeva today trades for a very similar price as it did in summer 2019. It’s as if the past few years didn’t mean all that much. And typically, that would be a reason to get compelled toward a cheaply valued stock.
However, as we go through and discuss the business’s positives and negatives, it’s difficult to get overly enthusiastic about its valuation of 11x next year’s sales.
Ready to Buy the Dip?
Everyone today recognizes that tech has been one of the hardest hit areas of this bear market. Depending on certain characteristics, your favorite businesses were either hit in February 2021 or if you were investing in a profitable enterprise, such as Veeva, you got hit on the second wave starting November 2021.
But wherever you hid within tech, the past year has been rough. And with this in mind, everyone is just so eager to buy the dip.
Every time that it looks like the Fed has to stop raising rates or pivot and reduce rates, there’s a rally in tech stocks.
Investors are just so eager to get back into the winning trade of 2020.
Revenue Growth Rates Start to Mature
There’s a quiet hope that Veeva will beat revenue consensus by at least 1% or 2% so that Veeva could be seen to grow in the high teens, rather than the mid-teens.
That being said, if we look over the past year’s surprise revenue figures, Veeva has not really positively surprised more than 2%. Thus, I believe that we can take Veeva’s guidance at face value. What we see today is not a Veeva that’s hitting out those high mid-20s CAGR figures. Not really.
What we see is a business that’s growing squarely in the mid-teen range.
Seeking Profitability, Before It Was Cool to do So
Anyone that’s spent more than a few moments considering Veeva knows that Veeva, unlike a plethora of other SaaS businesses, actually knows how to report a profit. Veeva had a profitable enterprise, before ”seeking a path to profitability” was the in thing on Wall Street.
But before we stray too far from the path, we inevitably circle back to the core question, will the market continue to turn an eye to a company’s liberal use of stock-based compensation?
Because if investors start to push back and look under the hood, what they’ll see is the following trajectory in Veeva’s GAAP operating profits.
- Q2 2022: 27%
- Q3 2022: 28%
- Q4 2022: 25%
- Q1 2023: 25%
- Q2 2023: 19%
Not only have recent profit results trended lower, but the spread between profitability in fiscal Q2 2023 and the prior year reaches 800 basis points. Clearly, that’s far from compelling.
Concurrently, stock-based compensation increased by 55% y/y. So then, we start to ponder, what’s really underway here?
Is Veeva able to report high 20s GAAP operating margins, where the bull case can be built, or are Veeva’s GAAP operating margins now coming in below 20%?
Because when stock-based compensation is up so dramatically, and investors have substantially less to cling onto, this puts into question the bull case.
VEEV Stock Valuation – 11x Forward Sales
At this juncture, my excitement for Veeva wanes. The problem here is to get comfortable with Veeva’s growth rates for fiscal 2024 (ends January 2024). Presently, Veeva’s consensus figures for the next fiscal year are around 16% CAGR.
Clearly, that’s very much in line with its recent revenue growth rates, thus providing some measure of comfort to this mid-teen growth rate.
However, the problem then is that it appears that Veeva’s growth rates are flattening out at substantially under $3 billion in revenues.
And if that’s the case, we could reasonably infer that Veeva’s near-term potential is reaching saturation. With all that in mind, I’m perplexed with its stock at 11x forward sales. That’s simply too rich a multiple for a company with very much middle-of-the-road revenue growth rates.
The Bottom Line
As alluded to throughout, there’s nothing wrong with Veeva. In fact, the business clearly succeeded in cutting out a moat for itself in life sciences. The only problem I have is, as a new investor coming to the stock, what’s really going to entice me to pay up such a hefty premium for the stock?
Even if we largely anchor our discussion over Veeva’s non-GAAP EPS figures, and assume that for fiscal 2024 the business grows by 16%, thereby matching its recent revenue growth rates, that puts Veeva’s EPS figures at $4.84 – a figure that exceeds analysts’ consensus of $4.69.
Yet even then, at that elevated EPS figure, that would put Veeva’s stock priced at 35x its forward non-GAAP EPS estimates.
While there’s clearly a lot to like about its path of innovation and execution, I nevertheless struggle to figure out how paying up more than 30x forward EPS for something growing at close to 15% CAGR is attractive.