Since February 2021, growth stocks have been in a bear market. Although, it’s nearly impossible to predict when the selloff will eventually end, we do know that a handful of these stocks are going to go on to make new highs.
Warren Buffett often talks about how we find out who is ‘swimming naked’ during bear markets. Well, the converse is also true as we also find out who is swimming with a wetsuit, flippers, and goggles. These are the companies who are continuing to grow earnings and revenue and are using the bear market to grow market share.
Today’s stock of the week - Veeva Systems (VEEV) - fits that description to a T. Read on to find out why the future is so bright for this company…
Company Background
VEEV is a cloud computing and enterprise software company for the healthcare, pharmaceutical, and life sciences industries. It provides software solutions for the unique needs of companies in these industries, from meeting regulatory standards to conducting clinical trials to managing operations.
VEEV is 46% lower from its top in August of last year. Unlike many growth stocks, the company has maintained its steady and solid growth through this rough period.
In a sense, this isn’t surprising as the company’s customers are in the healthcare and life science space which means they are less susceptible to changes in economic or monetary conditions. Additionally, these are end-markets that are in constantly expanding due to the aging population and rising trend of healthcare spending. Finally, the company has few competitors given the regulatory hurdles of operating in the space.
Strong Fundamentals
VEEV is also positioned at the intersection of two booming trends - healthcare and cloud computing - which show no signs of exhaustion in terms of growth. Not surprisingly, these sectors have birthed some of the biggest stock market winners in recent history.
The healthcare sector’s growth is fueled by demographics due to an aging population in developed countries all over the world, increased government spending, and the constant stream of innovations that lead to new treatments. Healthcare spending as a share of GDP has risen to 18% in 2020, from under 12% in 1990.
Cloud computing is forecast to grow at a 19% rate over the next few years with the industry reaching a size of $1.2 trillion. Over 80% of the companies in the S&P 500 have some sort of job listing related to cloud computing. In order to stay competitive, companies have no choice but to invest in cloud computing systems. Many of these systems were integral to keeping corporations running during the pandemic and enabling people to work remotely.
Strong Leverage
VEEV also has favorable economics as gross margins are relatively high in addition to revenue retention rates that are typically above 100%. This means that companies are spending more money on the platform on a quarterly basis.
Further, VEEV has a track record of being able to introduce new products and features that lead to increased monetization through acquisitions or internal development which bodes well for continued EPS growth and margin expansion.
Wide and Deep Moat
Another attractive feature of VEEV is that the company has a wide and deep moat. For one, healthcare companies are unlikely to switch IT systems given the cost and inconvenience.
Second, these markets aren’t easy to penetrate given that corporate managers at healthcare companies are unlikely to rely on unproven technology, especially as these companies deal with sensitive and sophisticated matters.
POWR Ratings
Thus, it’s not surprising that the stock is rated a B by the POWR Ratings which equates to a Buy rating. Given that VEEV is forecast to grow EPS at a 15% rate over the next 5 years, it’s not surprising that the stock has a B for Growth. Click here to see more of VEEV’s POWR Ratings.
VEEV has all the characteristics of a big-time, stock market winner given that healthcare and cloud computing spending are poised to expand at healthy rates over the next decade. The stock has continued to grow earnings and revenue at an above rate, while the stock price has remained flat, making it more attractive on a valuation basis. Thus, investors should consider taking advantage of the stock’s recent 20% decline.
VEEV shares . Year-to-date, VEEV has declined -28.30%, versus a -19.91% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles.
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