Veeva Systems Inc (VEEV): An IPO Loved by Hedge Funds
Initial Public Offerings (IPOs) can be an ideal way for investors to make a quick profit, especially if the company operates in a hot industry that garners a lot of market attention. For stocks that investors hold on to after their first day of trading, the opportunity could be even more interesting, as the shares potentially offer a fundamental growth story longer-term. We believe Veeva Systems Inc (NYSE:VEEV) could be one of those opportunities.
During the fourth quarter of 2013, many hedge funds bought new Class A shares of Veeva Systems, including Scott Fine and Peter Richards‘ Empire Capital Management (who, with a 6% stake, is the sixth largest shareholder), Christopher Lord‘s Criterion Capital, Joe DiMenna‘s Zweig Dimenna Partners, and Brian Taylor‘s Pine River Capital Management.
Veeva Systems Inc (NYSE:VEEV) is a $4.4 billion market capitalization healthcare technology company that provides cloud-based software solutions to the biopharmaceutical (life sciences) industry for managing their content as well as relationships with customers and other external parties. Unlike larger peers salesforce.com, inc. (NYSE:CRM) or Oracle Corporation (NYSE:ORCL), Veeva is one of the early companies in the so-called Vertical Software-as-a-Service (SaaS) business, or providing cloud-based services tailored to the needs of specific, specialized markets, which some believe will be popular business models going forward. The company went public on October 16, 2013 by selling 15.0 million shares (including 3.3 million sold by existing owners) at an IPO price of $20, up significantly from an original range of $12-14 range. The stock closed that day at $37.16 and has been volatile, but is basically flat versus its first day’s closing price due to a combination of factors, including a high short interest (44% of float). Moreover, the company showed signs of slowing growth during its third quarter earnings release in early December (reporting year-over-year growth in revenue/billings was 95%/47%, versus 116%/75% in the prior quarter) and news of a lost high-profile client (Genentech).
Veeva Systems Inc (NYSE:VEEV)’s premium valuation reflects its high growth status, with a forward price / revenue and EV/EBITDA multiples of 17.7X (versus 3.6X for its peer group of healthcare technology companies) and 77.8X (versus 16.5X for peers), respectively. Interestingly, despite its growth, the company is profitable (a trait it had maintained even before going public, unlike other pre-IPO healthcare stocks), with margins much higher than the peer group median.
Longer-term, there will always be demand for Veeva Systems’s productivity and compliance solutions by the life sciences industry, which is under pressure to cut costs amid the expiration of patents on brand-name blockbuster drugs while navigating an increasingly complex and global regulatory environment. Hedge funds making a directional bet on the continuation of this secular industry trend could be gaining the appropriate exposure through Veeva Systems Inc (NYSE:VEEV), despite its lofty valuation.