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Bull of the Day: Veeva Systems (VEEV)

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Stocks struggled for direction last week as investors hoped for a rebound from the toughest stretch of trading in months. Risk is back on the table on Wall Street, but that does not mean investors should ignore previously-hot stocks that are now on sale. In the tech world, our model is saying Veeva Systems (VEEV - Free Report) could be one of those plays right now.

Veeva makes cloud-based solutions for the pharmaceutical and life sciences industries. Its main offerings are presented in a software-as-a-service model and delivers industry-specific tools for CRM, content management, and many other enterprise applications.

Shares of VEEV have outperformed our software group over the past year, largely because of the company's unique industry-specific business model. Veeva's strategic initiatives have also been fruitful, as it has gained analyst favor through key client wins in Europe, expansion of offerings, and growth in its subscription business.

Sure, the life sciences industry has been slow to adopt cloud computing in comparison to other industries, but that has put Veeva in the perfect position to capitalize on new growth right now. Take the company's most recent earnings report, for example.

When Veeva posted its Q2 fiscal 2019 results in late August, the company reported adjusted earnings of 39 cents per share, beating the Zacks Consensus Estimate by 15% and improving more than 62% on a year-over-year basis.

Total revenue increased 25% from the year-ago period, with subscription service revenue adding about 25% on the year. Management also cited the strong performance of Veeva Vault R&D as a key reason for the revenue growth.

Moreover, adjusted operating margin in the second quarter was 35.5%, which represented an improvement of 360 basis points. Margin expansion was delivered despite an 18.5% uptick in operating expenses, so it is encouraging to see Veeva successfully improve profitability while also investing in research and development.

Analysts clearly saw the strength in the company's results, and earnings estimates for upcoming periods were immediately adjusted higher. Here is a look at VEEV's estimate recent revision trend:

The two factors listed above make up the bulk of the Zacks Rank. This helps explain why VEEV is currently sporting a Zacks Rank #1 (Strong Buy). However, there are at least a few other reasons to like the stock right now, including its recent price performance.

VEEV surged in the wake of its earning report, adding more than 22% over the next month to peak at 52-week high in late September. But the stock got caught up in market-wide selling, which punished momentum and growth companies in particular. Shares have since pulled back about 15%, marking an entrance to correction territory by many investors' definition.

Last week proved that chasing correction rebounds can be risky, but those who recognize the strong foundation of Veeva's business might like the stock even more now that it has pulled back. VEEV's P/E of 62.2 is still stretched, but a PEG of 3.2 is not outrageous for a company with a long-term projected growth rate of 19.3%.

This long-term growth will be supported by the continued release of new products. For example, Veeva is slowly rolling out its new Veeva Nitro platform, which offers an industry-specific database that merges key data sources of companies and ensures faster performance, even on the largest datasets.

This is the firm's first true analytics application and an example of how Veeva can leverage its life sciences leadership to gain new business through its own new products.

It is certainly fair for investors to be worried about the near-term risk in high-flying tech growth stocks. But the ones that will emerge as the best bets in the long run are those that have a genuinely great foundation to their business. Veeva is an example of that. This trend, on top of its positive earnings outlook movement, makes the stock our Bull of the Day.

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