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  • November 2013

    1

    www.suhailcapital.com

    Veeva Systems Inc: SaaS' Biggest Bubble and Tech's Best Short

    “Have Things on Wall Street Really Gotten This Bad Again?”

    Price Target: $8.00 / share

    Ticker: VEEV

    Contents:

    -Introduction -Background -Total Addressable Market -Market Penetration -Comparables & Valuation -Could we be wrong? -How to play this? -References -Disclaimer

  • November 2013

    2

    www.suhailcapital.com

    "It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts." - Sherlock Holmes

    In keeping with the recent trend of picking on good businesses with very ugly valuations, today we would like to focus on what we consider to be the biggest bubble in the entire Software as a Service (SaaS)/Cloud space. For those wondering, we define biggest bubble by the degree of certainty with which a company will lose over 50% of its current market value in fewer than 12 months. In this case, we see a less than 5% chance of that not happening. That makes this a more appealing short than many broken business models and the traditionally overvalued companies (the list is endless). Like many companies we have looked at as of late, it is a recent IPO. That means that while many people may think they understand the business and the stock; they actually do not. Instead, they tend to toss around buzz-words, and focus on headlines that reaffirm what appears to be the popular view of the name. This lazy man’s approach to analysis is typical of what happens when a bubble starts to form in a space. As you will see in this report, the people that are supposed to be providing the objective analysis are in fact back to their old bubblicious ways of making stuff up to justify the unjustifiable. Of course with the amount of IPO’s these days this is no surprise. The net result of this approach is an environment where investors simply can’t keep up and are in fact being fed blatantly inaccurate information. This is naturally where we have been finding opportunity.

    To provide you with some context for this piece, we will begin by looking at a recent Forbes article on Veeva Systems. The article is quite short, but at the same time quite illustrative of just exactly what is going on in markets and specifically in this space recently. (As far as we’re concerned is an ideal way to set the tone for the entire investment thesis detailed below)

    The article opens with this:

    “Veeva Systems is at the heart of two explosive megatrends: the cloud and life sciences. So it should be no surprise that the company had little trouble with its IPO. In today’s trading, the shares are up a sizzling 80%.”

    This is how momentum buzz-word investing works. Cloud is hot. Life sciences is hot. This company has exposure to both. So, it is ‘sizzling’.

    The article continues with this:

    http://www.forbes.com/sites/tomtaulli/2013/10/16/veeva-ceo-customer-dissatisfaction-is-my-opportunity/ http://www.forbes.com/sites/tomtaulli/2013/10/16/veeva-ceo-customer-dissatisfaction-is-my-opportunity/ http://www.veeva.com/

  • November 2013

    3

    www.suhailcapital.com

    “Yet Veeva has done something else that is remarkable: the company is not only growing quickly but is also profitable. In fact, the company has generated more operating cash flows – in the past year – then it has raised in overall funding. But to pull this off, Veeva had to take a unique approach; that is, the company pioneered something it calls the “industry cloud.” It essentially means having a laser-focus on a massive industry vertical.”

    Now pay very close attention to this paragraph, because it is basically what drew us to this stock. In a nutshell, fast growing successful SaaS companies tend to run significant operating losses. The initial infrastructure investment, which is the crux of the value proposition behind moving away from on–premise solutions; combined with the front-loaded acquisition costs (sales commissions and marketing spend), needed to acquire and grow a subscription customer base guarantee that a new SaaS entrant should be losing money in its early high- growth years. Veeva is unique in the space because it is a profitable SaaS company, but instead of delving into why or how they were able to achieve this; the takeaway from the article is that Veeva is an even better buy and deserves a premium to everyone else. (This SA article also reaches the same conclusion) The other interesting point to pay attention to here is the creation of a new buzz-phrase that Veeva supposedly pioneered. We can assure you that Veeva, which was founded in 2007, did not pioneer being a laser-focused SaaS provider to an industry vertical. (Blackboard in Education and Dealertrak in Automotive are two that come to mind as well as Medidata in the life sciences vertical) They are however the first to stick the phrase in an S-1 which seems to go a long way these days.

    Anyway, let’s move on to another very telling paragraph.

    “The CRM offering was a big hit. But for Peter, it was just the start. “We looked at where we could replace client-server systems and where there was lots of customer dissatisfaction,” he said. “I always like to say: ‘Customer dissatisfaction is my opportunity.’”

    And Peter found the opportunity in content management. Let’s face it, the life sciences industry involves dealing with huge amounts of documents. There are also mind- numbing regulations. In other words, it was an ideal target for the cloud.

    But of course, Peter did not stop here either. He then went on to create Veeva Network, which creates a rich master record of customers.”

    Ahh, this is an innovative and very diversified product offering company. The interesting thing here is that CRM is presently 95% of Veeva’s subscriber revenues. More on that later, but for now you should get where we are going with this.

    http://seekingalpha.com/article/1753182-veeva-systems-a-profitable-cloud-offering http://seekingalpha.com/article/1753182-veeva-systems-a-profitable-cloud-offering http://www.sec.gov/Archives/edgar/data/1393052/000119312513400469/d541293d424b4.htm

  • November 2013

    4

    www.suhailcapital.com

    Veeva has done very well for itself over the past five years, but for the most part this author and most investors in the stock don’t realize what they are dealing with. This is a vertically focused CRM provider that has been basically incubated by Salesforce.com. They are for all intents and purposes a white-labeled CRM SaaS provider. This is how they have grown so quickly and with such capital efficiency. They skipped the investment cycle and outsourced to Salesforce.com in exchange for 20% of their subscription revenue, and at IPO they have already achieved a very high penetration in their addressable market. Common sense would dictate that such a model would trade at a steep discount to a horizontal proprietary SaaS platform, and not at the significant premium this stock commands. Moving forward there are obviously a lot of question marks regarding how their relationship with Salesforce.com will evolve (if you were CRM and had incubated Veeva what % of sub revenues would you demand when they have achieved a commanding market share?), and what additional product offerings can generate meaningful revenue growth beyond CRM.

  • November 2013

    5

    www.suhailcapital.com

    Background

    Veeva is a cloud based CRM provider for the life sciences industry. This means their software utilizes multi-tenant architecture that allows them to provide upgrades to all customers simultaneously. The main competitors in the space are Oracle-Siebel and a French company called Cegedim. Veeva was founded in 2007 by ex-Salesforce.com early-stage employee Peter Gassner, and ex-Siebel life sciences employee Matt Wallach. (the firm was largely funded by $3 million in angel money and a $4 million investment from VC Emergence Capital) The company was quick to embrace the Ipad as a pharma Salesforce tool, and their flagship product Veeva “Irep” provides multiple channels. These include both industry closed looped marketing capabilities as well as traditional CRM functionality through a cloud based platform. They also have a Veeva “Vault” offering for enterprise document management, and recently launched a master data management of customer data solution called “Veeva Network”.

    Now, before we get into our bear case against the stock, let’s just reiterate that what these guys have accomplished is pure genius. They spotted a gap in the market, and found the fastest most capital efficient way to fill that gap. Rest assured there are a lot of people in the CRM Life Sciences space who are probably kicking themselves for not trying the same thing, and plenty of VC’s wondering how they missed out on 300x+ return over 5 years. (Interesting side note, the original name on the certificate of incorporation for Veeva in 2007 was Rags2Riches Inc…so mission accomplished and then some) Honestly, how many people on planet earth will ever turn $7 million into $1.2 billion we think Veeva is worth? We point this out because there are going to be some people who view this robust short-thesis as an attack on the company when in reality it is nothing more than a very systematically driven critique of the wildly mispriced stock of a well-run business. The recent flood

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