In my June 22 e-mail, I took a quick glance at software company Veeva Systems (VEEV), noting that my old friend Michael Burry of The Big Short fame had been buying the stock.
With the stock trading around $153 back then, I wrote:
Veeva has gotten whacked in the "SaaSpocalypse." It's at a six-year low and trades at 16.9 times this year's estimates...
Since then, it has rallied 35% to close yesterday at $206.25.
The company hit my radar screen again over the weekend when my friend and founder of Stansberry Research, Porter Stansberry, wrote favorably about it in his X post that I covered in yesterday's e-mail:
Veeva runs the customer relationship management and regulatory document systems of the pharmaceutical industry. Nineteen of the top 20 biopharmaceutical companies use Veeva's regulatory information management platform...
You cannot replace [its software] with a model that is very good at writing code. You would have to re-validate a decade of regulated records, in front of a regulator, on a system with no track record, to save a fee that rounds to nothing in terms of the cost of building a new drug.
How small a fee? Veeva's licensing runs somewhere between roughly $1,800 and $6,600 per sales representative per year. A fully loaded pharmaceutical sales rep costs the employer between $134,000 and $219,000 a year. The software is 1% to 5% of the cost of the person using it.
On how Veeva is integrating AI (rather than being replaced by it), he added:
Veeva is giving its AI agents away free inside Vault CRM through 2030, which is the single most revealing data point in the set: Veeva does not need to monetize AI, because Veeva's moat is the validated record, not the intelligence applied to it.
Finally, he wrote that Veeva has a "28.7% operating margin, 68.5% return on invested capital, a 44.3% free cash flow margin, and effectively no capital expenditure at all."
That sounds interesting to me. So today, let's take a look at the company's historical financials and valuation...
Revenue and operating income have grown hugely over the past 15 years:
Veeva has extremely high gross, operating, and net income margins:
(Note: For most companies, net income margin is usually much lower than operating margin because of taxes. But in Veeva's case, this is offset by income from its large cash hoard, as I discuss below.)
Veeva's cash flows are a thing to behold – high and steady growth with almost no capital expenditures ("capex"):
Veeva made a few small acquisitions and accelerated share repurchases in the past two quarters. Other than that, it hasn't done much with its large and growing free cash flow ("FCF"):
Diluted shares outstanding rose an average of 1.4% annually over the past decade – not bad for a software company. But they were down slightly in the past two quarters as the share repurchases kicked the stock:
With lots of cash coming in and very little going out, Veeva's net cash has steadily grown:
In summary, Veeva's historical financials are among the best I've ever seen – easily in the top 1%. It's a high-margin, high-growth, asset-light business that gushes FCF and has a pristine balance sheet.
It's no wonder that the stock has traded at an average of 60 times forward price to earnings (P/E) since its October 2013 IPO:
It hit an all-time low of 16.6 times right around when I first wrote about it on June 22.
Since then, it has rallied to 22.8 times this year's consensus analysts' estimates of $9.06 per share.
That's a market multiple for a far above-average business – just the kind of setup I like. But this assumes that AI doesn't impair the business, as many investors fear.
So tomorrow, I'll do a deeper dive on Veeva's business and services. I'll also share the bear case for the stock... and whether I believe it. Stay tuned!
Best regards,
Whitney
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