As the digital economy picks up steam, more businesses than ever are recognizing the benefits of updating old operations and procedures. Take healthcare for example. Two technology outfits in particular have made solving the unique challenges inherent to health sciences a priority: Veeva Systems (NYSE: VEEV) and Cerner (NASDAQ: CERN). Both have made great headway growing their digital platforms as healthcare, pharmaceutical, and life science companies make more use of each companies' respective services.
Though there are similarities between Veeva and Cerner, the two tech businesses have been on different paths the last few years. The future looks bright for both of them, but the reasons for considering each stock are very different.
Powerful pure-play growth
Veeva Systems focuses its attention on pharmaceutical and biotech companies, providing a suite of software and services from clinical data management to safety and quality control. Cloud-based software like what Veeva specializes in has been growing gangbusters the last few years, and there is no exception here. During the 2019 fiscal year (the 12 months ended January 31, 2019), revenue increased 25%, and adjusted earnings per share grew an impressive 70% -- including a massive 88% surge during the fourth quarter.
Veeva is still adding lots of new customers, but one of the more impressive metrics is the revenue retention rate. At 122%, the figure shows that Veeva isn't just holding on to customers, but those customers are expanding their use of Veeva's growing lineup of software as time goes on. It's a powerful business model, one that helped gross profit margin on subscription services increase to a whopping 83.2% last year.
As impressive as Veeva's results have been, a high rate of growth means the tech company can only be had at a steep price. Trailing 12-month price-to-earnings ratio (P/E) is 93.3, and 12-month forward P/E is 71.4. Those figures are implying another year of double-digit profit growth, but the stock is by no means a bargain. At current prices, the only justification is if an investor believes Veeva has years of robust bottom-line expansion ahead of it.
Image source: Getty Images.
A long-term value in the making?
Cerner is also a provider of health company technology, assisting clinicians with care decisions as well as offering clinical and financial systems for managing day-to-day operations. In 2018, Cerner's revenue and adjusted earnings increased 4% and 3%, respectively. In the first quarter of 2019, revenue and adjusted earnings results improved 8% and 5%, respectively.
That pales in comparison to the growth rates Veeva is putting up -- especially on the bottom line -- but Cerner is a much larger business with 2018 revenues totaling $5.37 billion to Veeva's $862 million. However, Cerner has similar profit potential. Gross margin was 82.5% in 2018, and the company recently agreed to changes proposed by activist investor Starboard Value to boost the bottom line in the years ahead. Paired with the optimism surrounding its recent quarterly reports, the agreement has led to a 23% rebound in share price so far in 2019 as of this writing -- a welcome situation after a 22% drop during the 2018 calendar year.
However, after it's recent rally, Cerner isn't exactly a bargain either. Its 12-month trailing P/E is 34.4, and forward P/E is currently 24.4. Like Veeva, that implies the next year will deliver a double-digit rise in profits. Cerner's bottom line has been sluggish at best in the recent past, but there's renewed optimism that the health tech company will get things back on track.
Two buys for different reasons
Veeva is a more profitable business model and is growing at a much faster pace (Veeva's operating margin is 26% to Cerner's 14%). Thus, it trades at a steep premium. Cerner is growing at a much more modest clip, but is the relative value play when compared to Veeva. It also initiated a 1% annual dividend in 2019, and Cerner has agreed to increase its share repurchase authorization to $1.5 billion at Starboard Value's suggestion. With a market cap of $20 billion, that's a significant return of capital to shareholders in the next couple of years.
Which is the better buy? These two companies are at different stages of their existence, but both stand to benefit as the digital economy continues to expand in the years ahead. However, neither are cheap (when factoring for growth at Veeva and a potential rebound at Cerner). Thus, for investors wanting to bet on tech adoption by the life sciences, I'd preach buying both a little bit at a time in set increments (like monthly or quarterly) and sitting on them for the long haul -- but go in slow and keep those initial buys small.
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Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Veeva Systems. The Motley Fool recommends Cerner. The Motley Fool has a disclosure policy.