Yesterday, Veeva Systems (VEEV) released third quarter results. They reported a small beat of expectations in terms of EPS and issued guidance that was roughly in line. The market initially responded positively with the stock hitting a high of $61.47, but then reversed and dropped all the way to $54 as the post-earnings conference call with analysts revealed questions about the outlook for growth next year.
This ably demonstrates something that I have talked about many times in the past. As a retail trader or investor, any attempt to react quickly to an earnings announcement is far too risky to be a good idea. There is nearly always more information than it initially seems, so waiting and then trading the reaction to the news rather than the news itself make far more sense, and that is true with VEEV.
Any reaction to earnings and related news within a day or two of the release has, by definition, a narrow focus. Thus, in the case of Veeva, the fact that a possible slowing of the growth rate next year caught people by surprise caused the stock to drop dramatically, but that ignores some big picture factors that make VEEV look like a bargain after the decline.
They are a software company that focuses on pharma, biotech and other life sciences businesses and that, combined with their history, is the key to understanding the opportunity here.
Firstly, Veeva’s guidance has been conservative in the past, so it would be no surprise of it were again. That is made more likely by the “everything else remaining equal” approach that companies take to their forward guidance. It is only right that companies operate that way, as speculation as to potential big picture changes should be left to speculators, but that assumption of stable market conditions in anything healthcare related right now seems like a stretch.
Healthcare is a sector that is currently seeing major consolidation, as evidenced by two recently announced deals. CVS (CVS) has said that they are, as previously suggested, buying insure Aetna (AET) and this morning we learn that United Health (UNH) is buying the clinic business of DaVita (DVA) for $4.9 billion. Health insurance, retail pharmacies, and clinics that deliver healthcare services are increasingly coming under the same ownership, and that will send ripples throughout the sector.
Let’s ignore for now the potential impact on you and me, the patients, of that trend and focus on the implications for other businesses in the sector. Expansion into other areas of the same sector, known as vertical integration, makes sense for large companies in many ways.
First, it is a way of growing that avoids the regulatory traps inherent in creating too dominant a position in one area of business. What it also does is to create a business with massive power within its industry, and that is what could have wide-reaching effects here, including being of benefit to Veeva.
The obvious use of that power will be to squeeze prices in the pharma and biotech industries. The U.S. has the highest drug prices in the world and consolidation among those that write the prescriptions, dispense the drugs, and pay for them will put pressure on those high prices. If the resulting savings are passed along to consumers that will be a good thing, but the chances of that happening and the potential effects are a subject for another article.
What matters here is how drug companies will respond if their pricing does get squeezed.
Your initial reaction is probably that when that happens it will be bad for companies like Veeva that provide services to that industry, but that is to ignore the nature of people in those businesses. They are often tech oriented, so while tighter pricing may be a reason to reduce staffing, salaries and other overheads, it makes the value case for a good, focused, flexible CRM system stronger than ever. Investing in efficiency now to prepare for the future would be a smart thing to do, and that is potentially good news for VEEV.
You may find that argument too convoluted or doubt it in some other way, but the fact is that Veeva’s guidance, which seems to be the reason for this big correction is based on a static market, and healthcare is anything but static. Given that, the selloff is overdone however you look at it. It was in response to a “not as good as it could have been” report and is therefore is most likely about market positioning going in rather than any long-term outlook.
The logical trade, therefore, is to buy once the stock starts to recover and there are signs that this dip is over rather than joining in and selling at or very close to the bottom.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.