Shares of Veeva Systems(NYSE: VEEV) rose 12.8% in August, according to data provided by S&P Global Market Intelligence. The company reported excellent quarterly financial results, and the stock's attractive valuation translated to gains as investors revised their forecasts higher.
Veeva had a stellar quarterly report
Veeva reported quarterly earnings on Aug. 28, sending the stock higher. The company achieved 15% revenue growth over the prior year, spearheaded by 19% growth in recurring subscriptions. That surpassed analyst estimates and the company's forecasts.
Investors love seeing traction for recurring subscription revenue -- the subscription model promotes customer retention and increases the lifetime value derived from each customer. Subscription cash flows are more reliable than licenses that don't renew automatically. This tends to be an important growth catalyst, and it generally justifies higher valuation ratios. Therefore, Veeva's changing revenue contribution is a bullish metric.
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Veeva's sales growth helped to drive a 32% expansion of its adjusted operating profit. That resulted in $170 million in quarterly generally accepted accounting principles (GAAP) profits, and nearly $850 million in free cash flow through the first half of the year.
The company is producing over $250 million of cash each quarter before any adjustments to working capital. Veeva's bottom-line performance exceeded analyst forecasts and the company's guidance from the prior quarter. These strong results prompted Veeva to revise its full-year expectations slightly higher for both sales and profits.
Veeva's valuation was primed for growth
Veeva's stock struggled to keep up with other stocks over the past year. It lagged the Nasdaq Composite and S&P 500 for the trailing-12-month period leading up to August. Investors became enamored with the growth potential of artificial intelligence (AI) software, and companies like Veeva weren't attracting the same attention.
VEEV Total Return Level data by YCharts
The company's important valuation ratios trended lower. By the end of July 2024, the stock's forward P/E and price-to-sales ratios were at the lowest point in years. Veeva was struggling with slowing growth, and investors had a hard time supporting its valuation when there were more promising growth stocks elsewhere.
VEEV PE Ratio (Forward) data by YCharts
Conditions were more favorable for Veeva in August. Its forward P/E ratio was down to 30, an attractive level for a company that's achieving 15% sales growth and even faster expansion for profits and cash flows. The August financial report marked the fourth consecutive quarter during which Veeva modestly outperformed Wall Street's expectations. Analysts revised their earnings forecasts higher, and the stock rose with that surging optimism.
Veeva Systems dominates the cloud software market for customers in the life sciences industry. It supplies mission-critical tools for sales, marketing, product development, and regulatory compliance. High switching costs and unrivaled specialization create a formidable economic moat. This helps to cement investor confidence now that the stock has a reasonable valuation compared to its impressive operational results.
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Ryan Downie has positions in Veeva Systems. The Motley Fool has positions in and recommends Veeva Systems. The Motley Fool has a disclosure policy.
