Is any company worth buying at good value?

Investment Analysis Clubs Saul’s Investing Discussions
1

Sure, sure Skechers is still at what may be a great value point even after its recent returns. Under Armour, at least from a historical and price to sales perspective may be. And these companies may start to rise if the current bull market trend continues as at some point, and from my experience with other bull markets, is that after a while, the best of breed stocks just get too expensive, and that is when money managers start to look for “value” and the second or third tier stocks, that have good businesses, but that have lagged, start to get interest.

One company I want to buy is Veeva, but its price to sale (enterprise value) on next year’s estimates is 7.64x with 20-25% sales growth expected. Current projections into next year is actually around 21% (if I recall correctly - but I am sure that will be raised). The thing about Veeva, however, is they have one of the largest CAPs of any of the new breed of software cloud companies. Veeva’s issue is its TAM, which it is taking real steps to increase. VEEV is already cash flow positive.

I am not looking at that many companies at this time. Too busy, too tired. We already talked about TWLO at ~5x sales on next year sales. I just looked at ZEN, there may be a “value” at ~4.45x next year’s sales on enterprise value. Here there might be legitimate reason for this. ZEN has been on the uptrend again, but from a low base. The shares crashed on an earnings miss and only now are starting to get back to where they were prior to the Trumpian era market. ZEN has higher growth rate expectations than VEEV and has not even come close to consuming its primary market. So maybe ZEN is one of those companies. Depends what you think of ZEN.

Tinker

16 Likes
2

Veeva.

So they’re basically the salesforce for life science (pharma) companies and so far have a 100% retention rate with a revenue of 544 million, up 33% yoy.

How do you value this? Enterprise value being larger than the rest makes me hesitant, but their retention rate, steady growth, and the trend of data and the cloud make me like this company. Also there’s this from the last conference call courtesy of seeking alpha. Expansion into other industries.

To-date, we’ve seen the most interest from chemical, CPG and cosmetic companies. We closed a number of initial deals and have multiple projects underway with organizations, large and small. Notable wins in Q4 include initial projects with two Fortune 500 companies, both happen to be top 30 global chemical companies.

We’re very encouraged by this early traction. The quality software market is underserved today. Customers are stuck on legacy and custom-built applications. Our early estimates indicate that this market represents well over $1 billion TAM, just in quality software outside of life sciences.

Our fundamental approach is the same outside of life sciences as it is inside life sciences. We start in one area and deliver cloud solutions that are dramatically better than existing solutions. We make early adopters successful and then expand through reference selling. We grow within accounts over time adding more divisions, regions and applications.

In closing, Q4 was a remarkable quarter to complete another great year. This month also marks Veeva’s 10th anniversary. We have executed well in our first 10 years. A year and a half ago, we set out a goal to reach $1 billion revenue run rate within life sciences in 2020. Today, we are tracking ahead of that goal and have planted the seeds for strong organic growth beyond 2020.

I’m very excited about the next 10 years at Veeva. I would like to thank our customers for their trust and partnership and our employees for their continued commitment to customer success, employee success and speed.

4 Likes
3

If VEEV can extend its TAM (and there is good reason to think that it can, and also reason why it did not go this route prior to now) then it is a buy it and hold it and come back years from now stock. A rare thing. That is one reason it is so highly valued (but still in the realm of reality).

100% retention rate for a company with more than $500 million in sales and 10 years in business!!! And I would wager every single one of these retained clients has been uphold over time, and quite happy about it.

Of the cloud companies (other than CRM) it is one of the slowest growing at present. 21% growth currently projected into next year. Also, it is just now getting past its IPO price, as it went out big, came back due to FUD issues (no one believed they could do to the life industry what they did) and now that they have, it looks like the initial IPO price was not so wrong to begin with.

I am not going to pass on a company with these characteristics. I just have a natural inclination to not want a company that is not growing faster than 30% a year, or that does not have the world as its oyster TAM. VEEV, I assume, is following the playbook that CRM created, and putting it on steroids, and the results show.

It is hard to find a young software company with the CAP that VEEV has. In fact, it is almost fair to say that VEEV has only pithy competition. There is not a single company that can touch VEEV. It is a matter of how fast the industry adopts, and how deep the industry adopts the cloud. The legacy vendors, once thought impenetrable, have fallen so far behind that there does not seem anyway that they can come back.

As VEEV gets larger, perhaps another upstart can find some weaknesses or material gaps in VEEV’s offerings and make some hay, but for now…dang…

nothing fancy here, or romantic, just pure professionalism. Like the Iceman in Top Gun, or the French guy in Ricky Bobby movie. Just too professional, too meticulous, mistake free, ice in their veins sort of thing, year after year.

Obviously at some point they will hit troubles again, but I think this is an accurate description of VEEV’s market position. The issues we have are valuation, growth rate (is it fast enough for the valuation), and TAM, can VEEV really become a multiple billion dollar a year company? They are already cash flow positive despite investing in their growth.

Tinker

7 Likes
4

That term should have been “unsold” not upheld.

Anywho, looking at CRM that is the most similar company to VEEV, CRM is currently selling for 7.17 or so on trailing sales. Plus or minus a little bit depending on the exact numbers you use.

Veev, is selling at 7.89 on forward looking sales on enterprise value (they have more than $500 million in cash and equivalents no long term debt and cash flow positive).

Last 5 years CRM is up about 212%. Where VEEV is on its TAM curve is to be determined, but since CRM currently has more than $8 billion in revenues (more than 10x what Veev has) VEEV is hopefully earlier in its growth cycle and thereby in its stock growth cycle. But either way market beating returns.

To put it into more traditional perspectives, less than 50x forward P/E (which we know is deliberately decreased due to focus on growth). If you take the forward looking revs of $875 million x what I think is a 20% net margin when a mature company, with very little customer churn, I have to think that is about right to conservative. On enterprise value, VEEV has a hypothetical 35 forward P/E. Sure not cheap, but then again, is cheap, given the competitive strength of this company and limited real competition. It shows that VEEV is not at a bubble valuation, is in fact very likely to relatively quickly (within a year) grow into its valuation on even traditional metrics, is highly profitable already so we are not speculating whether or not VEEV can suddenly turn on the money spout (as it is already even more cash flow positive than profitable).

The real risk seems to be how big and rapidly can VEEV grow and then exploit its TAM.

Yes, I talked myself into it. Looks like an excellent company to hold in your port. Maybe an upcoming market crash may give us a better opportunity. I am sure there will be one that affects almost all stocks regardless of merit. Veev has currently rallied because of its announced new partnership/integration with CRM. Making it of course a future potential merger/acquisition candidate, and limiting the perceived risks that CRM might become a competitive threat to VEEV or otherwise deny them access to their cloud platform that VEEV’s CRM product makes use of.

Enough from me. I hate when there is not much to dislike. Got other things to do.

Tinker

5 Likes
5

For crying out loud! The term should have been “up sell” up sell…urgh.

6

limiting the perceived risks that CRM might become a competitive threat to VEEV

If I understand what VEEV does, their whole platform is built on top of Salesforce’s force.com platform. In that way, CRM is never a threat but actually benefiting from VEEV’s growth. VEEV seems like a Value Add service provider using CRM’s platform.

I suppose they could decide they they want to offer more industry specific solutions at a higher price but maybe it is easier to let others use your platform to do such specializations.

7

Yes, exactly. But there is always fear, and VEEV’s contract with CRM has an expiration date. Now this perceived concern is further minimized.

I looked at CRM more closely. CRM still has 20%+ growth rates estimated going forward even as it grows to $10 billion + in sales estimated for next year. CRM still has a way out there P/E and the price to sale of over 7. 6 forward. Relevance is pretty straight-forward given how similar VEEV is to CRM and that CRM valuation is possibly instructive to VEEV.

If VEEV can grow its TAM…

Tinker

8

VEEV is built on top of CRM. CRM will benefit from VEEV adoption and usage though not as much as a direct sale agreement I would have thought.

CRM and VEEV have a mutual non compete in pharma so VEEV has that market to shoot for without worrying about competition from CRM (although other CRM build out players could compete). They do not have the same non compete with CRM in other sectors such as consumer health, med tech, CPG, Cosmetics etc. They could negotiate such a deal or they could go head to head as a value added solution vs core CRM solution. As a result their penetration opportunity and speed is not likely to mirror their pharma uptake. I haven’t seen how these agreements beyond core pharma have played out.

One point - they typically have a 3 year deal cycle. Anyone investing should pay attention to key events (not dissimilar to patent cliffs in pharma), where renewals are scheduled and the opportunity for competitors to enter exist. If these are en-block in a particular year then tread with caution if the competition is hotting up and present. One example is QuintilesIMS with their Nexus mobile solution.

Ant

1 Like
9

https://www.glassdoor.com/Reviews/Employee-Review-QuintilesI…

Just had time to look st the first link but there may be a reason why Veeva so thoroughly disrupted this life science market. Certainly anecdotal when looking at Glassdoor but hardly unprecedented for comfortable incumbents to be unable to execute against an innovative upstart.

I will review more tomorrow. But there are real switching costs. Given how dominant VEEV has become Inhave to assume their product is pretty good. As such, customers are not going to simply switch just because a competitor offers a somewhat better or somewhat cheaper product. Either Veeva’s product sucks, or the upstart needs to have something disruptive.

I doubt Veeva sucks, and I doubt the incumbent has a disruptive product.

This first link, albeit anecdotal, does play into this usual narrative that we have so often seen play out as incumbents are slow or incapable of innovating when a disruptive force enters the market. Sometimes from cannabilization issues, burn just as much cultural and lack of expertise issues, and simply responding too late.

OS/2 from IBM may be one of the first and most powerful such examples in software. It was their own friggin PCs and by all accounts their product was better than DOS (not a difficult thing to be) and yet even IBM, nobody ever got fired for choosing IBM, could not pull off this feat.

TBD but I’m not too concerned about it given just how quickly VEEV dominated this market as an upstart. Obviously the legacy vendors were not serving their clients well to begin with to upset the switching costs and years of status quo so quickly and thoroughly.

Tinker

10

https://www.veeva.com/resources/veeva-systems-now-ranked-amo…

We can probably rule Veeva out on the issue of crappy product. That leaves an incumbent who has already been disrupted with a disruptive innovation of their own or they have lost most if not all of these clients and will need to compete for remaining clients against a new market leader.

Tinker

11

Hi Tinker - the point i was trying to make previous is that penetrating pharma is not an appropriate analog for Veeva in other markets. Not that i think pharma is at risk but at the same time I don’t think other sectors are as vulnerable or lack the competition that pharma did.

One potential disruptive play and maybe Jon can comment on this is Microsoft Dynamics. By all accounts it is 1) under rated as CRM play but more importantly 2) potentially about to come with LinkedIn inside. If Msoft mergers the world’s biggest business directory with a CRM system that’s a hell of an advantage over an empty piece of SFDC. Also note Msoft has significant penetration of Healthcare on the provider side so if life science and healthcare converge then Msoft will com into play.

Ant

1 Like
12

Ant, I agree with you in regard to new verticals. The incumbents are still lacking competitively in these highly regulated industries I highly suspeect, so that is good for VEEV but totally different terrain. It is the barrier that if VEEV can break separates it from CRM potential success.

Life science is pretty much conquered but the next verticals are different animals in many respects. I agree.

Tinker

13

https://www.microsoft.com/en-us/dynamics365/home

Microsoft Dynamics looks like a great suite of applications. Microsoft is not an incompetent legacy vendor. It took them some time, but they have managed to move beyond the innovator’s dilemma and like Apple does, not let cash cows kill their forward looking business. They are doing 365 everything.

This said, this Dynamics product seems to me to be, like wha most Microsoft products are, as too generalized, and open, as to its applications. Meaning that it is a great set of tools for doing about anything, but to do very specific things (such as is required in regulated industries) you need to create something very custom.

I can see consultants, or perhaps someone, using Dynamics as the platform that is customized for use in specific regulated industry verticals.

However, there is no way that this product, absent some specific directive from the home office, can compete in particular regulated verticals against an utterly focused, and specifically vertical focused, VEEV.

As a small example, although I have the entire Office Suite, I run my business (that is built directly on top of Microsoft Exchange) on another cloud vendor, that built it system on AWS, but has so customized the software for my specific little vertical within the practice of law, that incorporates everything from email to contacts to calendaring to billing (and you can plug in accounting if you want), along with too many to name customized features for To Dos, scheduling, etc., that you would have no idea, that at its core, it is Exchange, but built out on AWS.

Microsoft absolutely could not compete with my vendor, in my field. The product I use is night and day different from what Microsoft offers, and there is no way Microsoft would have the expertise to build this, nor commit the resources to do so. No way in the world.

So, although it is a good product, I don’t think it is a real competitive factor in specific highly regulated verticals that VEEV is going after with extreme focus and care to building product specifically made for each of these very demanding verticals.

These are verticals that the general product is not adequate to service. Microsoft is selling general product to the masses, and not specific product to specific verticals.

Because of this, if a vendor wanted to break into one of these verticals, acquiring VEEV would seem to be a good solution to that problem.

Tinker

4 Likes
14

Not on AWS but on Azure cloud. Anyway, point being Microsoft cannot compete with its products in my field, as they will never put together the resources and expertise needed to specifically address my very critical needs. The general tools themselves are not sufficient.

Tinker

15

http://finance.yahoo.com/news/microsoft-just-showed-off-exac…

Here is Microsoft rolling out its LinkedIn incorporating CRM product.

I am guessing this sis the big value to come out of the very expensive acquisition. That Salesforce wanted and that Microsoft got.

Tinker

1 Like