Since February 2021, growth stocks have been in a bear market. Although, some believe that the market has bottomed and the worst is over; others see this as an inevitable bear market rally that will roll over. While this is certainly an interesting debate, what we can be certain about is that some portion of growth stocks have certainly bottomed
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…
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.
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.
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…
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