Here’s why Veeva Systems stock gained 13% last month

Actions of Veeva Systems (VEEV 3.10%) rose 12.8 percent in August, according to data from S&P Global Market Intelligence. The company reported excellent quarterly financial results and the stock’s attractive valuation translated into gains as investors revised their forecasts higher.

Veeva had an excellent quarterly report

Veeva reported quarterly earnings on Aug. 28, sending the stock higher. The company posted a 15% increase in revenue over the previous year, led by a 19% increase in recurring subscriptions. This beat analysts’ estimates and company forecasts.

Investors like to see 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 do not automatically renew. This tends to be an important growth catalyst and generally justifies higher valuation ratios. Therefore, Veeva’s changing revenue contribution is an optimistic measure.

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Veeva’s sales growth contributed to a 32% increase in adjusted operating profit. This resulted in $170 million in quarterly GAAP profits and nearly $850 million in free cash flow in the first half of the year.

The company generates over $250 million in cash each quarter before any working capital adjustments. Veeva’s final performance beat analysts’ forecasts and the company’s guidance from the previous quarter. These strong results prompted Veeva to revise its full-year expectations slightly higher for both sales and profit.

Veeva’s valuation was primed for growth

Veeva stock has struggled to keep up with other stocks over the past year. Left behind with Nasdaq Composite and S&P 500 for the 12-month period leading up to August. Investors have become enamored with the growth potential of artificial intelligence (AI) software, and companies like Veeva haven’t gotten the same attention.

VEEV Total Return Level data by YCharts

Major company valuation ratios have trended lower. By the end of July 2024, the stock’s P/E ratio and price-to-sales ratio were at their lowest point in years. Veeva has been struggling with slowing growth, and investors have had a hard time supporting its valuation when there were more promising growth stocks elsewhere.

VEEV PE ratio data (before) by YCharts

Conditions were more favorable for Veeva in August. Its forward P/E ratio has fallen to 30, an attractive level for a company that is achieving 15% sales growth and even faster expansion in profits and cash flow. The August financial report marked the fourth straight quarter in which Veeva modestly beat Wall Street expectations. Analysts revised their earnings forecasts higher, and shares rose on that growing optimism.

Veeva Systems dominates the cloud software market for customers in the life sciences industry. It provides essential tools for sales, marketing, product development and regulatory compliance. High switching costs and unmatched specialization create a formidable economic moat. This helps bolster investor confidence now that the stock has a reasonable valuation compared to impressive operating results.