With the S&P 500 skyrocketing by 30% over the last 12 months, finding reasonably-priced growth opportunities in the US has become far more challenging. But it’s not an impossible task. And one firm that seems to be primed for explosive growth in the coming years is Veeva Systems (NYSE:VEEV).
At a price-to-earnings (P/E) ratio of 57, shares of this tech enterprise don’t look remotely cheap. However, when compared to its 10-year average of 81, the firm appears to be trading at a 30% discount to its usual premium price point. Why has Veeva commanded such a rich valuation over the last decade? And why did I just buy more for my portfolio at this price point?
Growth catalysts on the horizon
Outside the world of pharmaceuticals and biotech, Veeva isn’t a well-known enterprise. But there’s a good chance that anyone who has taken medicine before has benefited from its expertise.
The firm’s behind the world’s leading drug development platform, which is designed to streamline the research process across the entire pipeline. That includes clinical trials all the way to commercialisation of new and existing drugs & treatments.
Today, 85% of the global life sciences sector is dependent on Veeva to function, including 94% of the world’s 50 largest industry leaders. And if it were to suddenly disappear, the global healthcare industry could crumble. And since the platform’s heavily integrated into customer operations, it naturally generates switching costs, resulting in a very sticky relationship and pricing power.
Now that interest rates have started falling, capital liquidity‘s on the rise. As such, delays in clinical trials and research projects may soon start to end, driving up demand for Veeva’s solutions in the short term. And since the long-term need for efficient drug development and marketing isn’t likely to disappear, the long-term trajectory of this business is also exceptionally promising.
Risk versus reward
The group’s impressive growth and free cash flow generation have long granted it a premium valuation. And while performance has slowed in recent quarters due to the economic landscape, shares still aren’t ‘cheap’ in the traditional sense.
Obviously, that introduces the risk of volatility to a portfolio. However, even with its market-dominant position, Veeva isn’t immune to disruption. Salesforce has recently announced plans to launch its own platform for the life sciences sector, which would be in direct competition with Veeva. Suppose this new platform proves just as capable? In that case, it could undermine Veeva’s existing pricing power as well as make future growth far more challenging.
Nevertheless, in an industry filled with extensive regulation, Veeva’s experience undoubtedly gives it an upper hand against its new rival. And while it’s a risk worth watching closely, I feel that the stock’s weakened valuation has created a not-necessarily-cheap but fair entry point to top up my existing position.
This post was originally published on Motley Fool
