The Largest Life Sciences SaaS Stock
We first founded Nanalyze as a forum where retail investors could share information on companies involved in nanotechnology. Our focus and investment methodologies have evolved significantly over time, as we expanded our coverage and analysis across nearly a dozen disruptive technology categories. One key theme to emerge from two decades of experience is the value we place on software-as-a–service (SaaS) firms. We’ve written extensively about why we place a premium on these businesses, which typically offer highly predictable revenues with high gross margins that help fuel high-growth companies. Many of the stocks in the Nanalyze Disruptive Tech Portfolio are SaaS companies.
And, as we discussed in a recent video on the best SaaS stocks, we tend to favor horizontal SaaS companies that serve different industries rather than vertical SaaS companies that specialize in a specific industry. The reason is pretty simple: a platform capable of servicing multiple industries will generally have a larger total addressable market (TAM) than one that serves a specific niche. Take the example of Snowflake (SNOW), a $50 billion cloud storage and computing company with an estimated TAM of $248 billion by 2026. Compare that to the largest life sciences SaaS company by market cap, Veeva Systems (VEEV), which is currently valued at $30 billion with a TAM of $13 billion.
Both companies just cleared $2 billion in revenue in their last full fiscal year. That means Snowflake has tapped less than 1% of its TAM (and is also riding the generative AI wave) versus about 15% penetration for Veeva. Is there any universe in which we would consider holding Veeva stock, which appears to have relatively “limited” upside?
About Veeva Stock
Some say Salesforce was the pioneer of SaaS business models, and they’re certainly the largest in any domain. That’s where Veeva’s founder and CEO, Peter Gassner, worked as senior vice president of technology back in the day. He helped build out its platform during the transition period when the company went public in 2004. The connection between the two companies didn’t end there. Founded in 2007, Veeva built its core software on the same Salesforce platform that Gassner had a hand in deploying. But that will come to an end beginning in 2025, as Veeva migrates its Salesforce-based applications to its own platform in a cost-cutting move. We’ll come back to the implications for both companies later. First, let’s learn a bit more about Veeva stock.
Headquartered just outside of the greater San Francisco Bay area, Veeva went public 10 years ago. While hindsight is 20-20, it is worth noting that an investment in Veeva stock would have netted you a return of about +370% since its inception. That pretty well tracks with Invesco QQQ (QQQ), a tech-heavy exchange traded fund (ETF) made up of the cream of the computing crowd, during that same time period. Like many high-growth tech stocks, Veeva stock outperformed its peers between 2019 and 2021 – peaking at +750% at one point – before returning to the mean. Regardless, Veeva stock has demonstrated a strong history of growth, though we all know that past performance does not guarantee future results.
In fact, as you can see from the above chart, Veeva expects just 10% growth during the current fiscal year after basically doubling revenue between 2020 and 2023. However, that’s more of a function of how the company is structuring its multi-year contracts. It’s kind of complicated but involves a termination for convenience (TFC) right for customers, which will change the timing of revenue recognition this year to the tune of about $95 million.
Starting next year, the amount of revenue recognized from such orders will generally be consistent with the amount invoiced for the relevant term of the order. Veeva management went as far as to provide guidance out to 2025 to reassure investors that the company is still growing revenues.
How Does Veeva Make Money?
All this begs the question: How does Veeva make money?
The company has two money buckets related to its SaaS business, which accounts for about 80% of total revenues. Veeva Development Cloud includes applications for the clinical, regulatory, quality, and safety functions of life sciences companies, all built on the company’s proprietary Veeva Vault platform. This is basically the R&D software support side of the business. One of the major markets is the digital management and data capture around clinical trials – an area where AI companies have been competing for a while. Veeva management sees clinical trials to continue to be a big growth area, with 30% revenue penetration in clinical operations but less than 5% in clinical data. To the latter point: Six of the top 20 pharma companies now use Vault Electronic Data Capture for all of their new clinical trials.
The other half of the SaaS business is Veeva Commercial Cloud, which includes software and data solutions to help life sciences companies commercialize their products, including its flagship customer relationship management (CRM) software. While the Commercial Cloud business currently brings in more money, that’s projected to even out in the near future. The other 20% of revenues consist of the usual consulting and professional services work. The company also appears to be testing the waters outside of the life sciences industry with a small handful of software solutions for the consumer products and chemicals industries.
Should You Buy Veeva Stock?
Veeva does not offer many metrics beyond the bare minimum. For instance, we really like to get stats on net retention rate, which tells you how much more (or less) money existing SaaS customers are spending on the platform each year. The company does offer some specific numbers here and there, such as adding 44 new customers for its core CRM suite or attracting 60 new customers to its regulatory offerings under the Vault Development Cloud. Still, it feels like retail investors have few ways to dig deeper into the business.
Investors should be aware that in 2021 Veeva became a public benefit corporation (PBC), which means it has a legal obligation to consider the consequences of its business decisions on the environment and society at large. Regular Nanalyze readers know that we believe a company’s primary responsibility is to its shareholders, so PBC status is not something we seek out in a stock that we own but nor is it a deal breaker. The fact that Veeva has been able to grow revenues and turn a significant profit consistently demonstrates that management is keeping its eye on the bigger prize.
The bigger concern is obviously competition for that $13 billion TAM. Veeva’s biggest competitor is probably a digital healthcare company called IQVIA (IQV). It also offers a CRM application built on the Salesforce platform, as well as various data products and other applications that compete directly with Veeva products. Sporting a market cap of $40 billion on more than $14.4 billion in revenue, including more than $1 billion in net income, IQVIA is a formidable opponent. It doesn’t help that the two companies have been locked in lawsuits for more than five years. In May 2021, a court ruled in favor of IQVIA on issues around “fraud” and “theft” of data, among other allegations. An antitrust lawsuit by Veeva against IQVIA is still pending.
In addition, the dissolution of the deal between Salesforce and Veeva means the former is now free to compete openly against the latter. Conversely, the Veeva desertion could be a nothingburger in the big scheme of things for Salesforce or something that snowballs into a bigger problem down the road as customers deploy their own native cloud platforms.
Conclusion
There is a lot to like about Veeva stock but we’re not in love yet. The company has a solid history of revenue growth and making money for its investors, but can that continue in the current macroeconomic climate? And against a growing number of competitors? Led by Gassner, Veeva seems like a well-run and profitable company that will find it increasingly challenging to continue its high growth ways into the future.
