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Stock market volatility can create great opportunities for long-term investors. The recent growth stock sell-off has produced a handful of attractive valuations, and I’m excited to scoop up some great investments at a discount. The next time I move cash into the market, I’m going to buy more of a tech stock that is set to capitalize on the inevitable growth of the life sciences industry.
Veeva Systems
Veeva Systems (NYSE: VEEV) provides cloud-based software with a variety of applications in the life sciences market. Its customers include pharmaceutical companies, biotechs, research organizations, device makers, and other manufacturers. Veeva offers a range of products and services that generally fall into two categories: R&D and commercial.
The research and development segment enables data management and patient engagement through clinical trials. There are also important tools for regulatory compliance, document filing, payments, quality assurance, and clinical data analysis. On the commercial side, Veeva offers customer relationship management (CRM) tools to support sales teams, along with analytics and marketing tools.
Veeva’s customers enjoy improved quality and efficiency in two of their most important functions — developing new products and selling them. That value proposition is crucial for the life sciences industry, which is not going away anytime soon.
Image source: Getty Images.
Veeva’s growth can outpace the market
Long-term growth is an important consideration, and Veeva passes the test. The company reported 26% revenue growth in its most recent quarter. That’s a slight slowdown from 29% in the previous quarter. Deceleration is certainly a trend to monitor, but anything above 20% is high enough to entice me. Veeva set an aggressive goal of $3 billion in annual revenue by 2025, and it’s tracking ahead of schedule so far.
The catalysts for sustained growth are clear. According to Veeva, its addressable market is $13 billion annually. Based on current sales, it’s only capturing 14% of that market today. That leaves plenty of room to expand within its existing lane. Veeva will also benefit from growth in its target market. The global biotech market is expected to grow 16% annually over the next few years. The pharmaceutical industry should expand at a stable but more modest 5% rate.
As these companies get bigger, they’ll continue to invest in digital transformation, fueling an estimated 7.7% growth rate in life science analytics spending.
A wide economic moat
There are plenty of heavy hitters in the cloud computing space that offer analytics, CRM, and data management products. However, none of the major players has developed the life sciences specialization that Veeva has. This niche domination creates a competitive advantage.
Veeva has more than 1,000 customers, ranging from high-growth biotech start-ups to the largest drug companies. That scale, strong brand, and breadth of experience make it difficult for competitors to challenge Veeva.
The company can also prove that it’s developing deeper relationships with customers. Veeva measures and reports products per customer, which have grown 44% in the commercial segment and 60% in the R&D segment. It also reported 124% net revenue retention for the full fiscal year 2021. That data is a year old now, but all other metrics point to a similarly high retention rate today. This is a clear signal that customers are pleased with Veeva’s solutions, and they’re voting with their wallets.
Veeva is peerless in its target market. The company’s competitive advantage is protected by scale, quality, and switching costs. That creates a wide economic moat that supports cash flow stability for years to come.
Why I’m ready to buy
I’ve owned some Veeva stock for a while now, but I’ve been waiting for a chance to buy more. I wanted a heavier weighting in my portfolio, but it was too expensive for my taste. That’s changed drastically in recent months.
The stock’s price-to-sales ratio peaked around 40 in 2020, while its forward price-to-earnings ratio was above 100. At a 25% to 30% growth rate, those valuations assume multiple years of uninterrupted strong financial results. That pushes the balance of risk and reward past my comfort zone.
Luckily for me, investors have been reducing the risk in their portfolios across global capital markets. That put downward pressure on high-valuation growth stocks in recent months. Veeva stock has dropped more than 32% from its 2021 high, and its valuation ratios were nearly cut in half.
VEEV PS Ratio data by YCharts
The stock is much more attractive relative to the underlying business fundamentals. That increases the likelihood of long-term outperformance.
Veeva is still a growth stock in the midst of a rocky stock market and rising interest rates. I’m anticipating heightened volatility for at least a few months as a result. The company also reports quarterly earnings in a few weeks, which could lead to sharp gains or losses in the short term. I’ll stay up to date with results and management commentary, but my time horizon is at least five years, and I like Veeva’s chances over that period.
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Ryan Downie owns Veeva Systems. The Motley Fool owns and recommends Veeva Systems. The Motley Fool has a disclosure policy.
