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Michael Burry's famous for calling the 2008 financial crisis before almost everyone else saw it coming. Of course, that doesn't mean we should blindly buy every stock he buys, but when a super investor with a track record like that starts buying a beaten-down software stock, I pay attention. Then I do my own research, understand the business, look at the risks, and decide whether it actually fits my portfolio.
And this time the stock is Veeva Systems. So, the question is did Burry just spot one of the few SaaS companies that can actually handle the AI storm, or is the market still right to be scared of software stocks? Let's break it down in this video. Over the last few months, software stocks got hit very hard.
The market is scared that AI could make software much easier to build. Now we even have this thing called Vibe Coding, where engineers or even people without technical background can build websites and software with tools like Claude Code from Anthropic. There is also another big fear around SaaS companies with seat-based models.
The logic is simple. If AI makes employees much more efficient, then the companies may need fewer workers. And if they need fewer workers, they may need fewer software seats as well. Fewer seats can lead to slower revenue growth, or in some cases even shrinking revenue. And in fact, in many cases this fear is fair, but I think Veeva may be different.
Because Veeva is not just another software company selling nice dashboards or optional tools. Veeva sits inside very important workflows in pharma industry, and not just important workflows, regulated workflows. This is the most important, and this is the moat of the company. So, what does Veeva Systems actually do?
In simple words, Veeva sells software to pharma and biotech companies. And if you look at the screen right now, you can see the business is split into two main parts. The first one is a commercial solutions. This part helps drugs companies with the sales, customer engagement, and commercial planning.
This is the older Veeva story. This is the part many investors already know. But the second part is R&D solutions. And to me, this is the more important part of the story now. This side of the business helps life science companies manage clinical trials, regulatory documents, quality workflows, and safety processes.
And if you look at the chart, you can also see something very important. Commercial solutions is still growing, but R&D solutions is growing much faster and it's now the bigger part of the business. That really matters because it shows Veeva is no longer just a pharma CRM company. That view is too old.
Today, Veeva is becoming a much broader software platform for life science. So, in very simple words, Veeva helps drug companies do two things. First, develop and manage drugs. And second, commercialize and sell them. And once you understand that, the whole story starts to look very different. The stock is down more than 40%.
So, why the market is worried? The market is not stupid. There are real reasons why investors are cautious on Veeva. The first issue is revenue growth deceleration. If you look at the chart on the screen, you can see that Veeva used to grow much faster. Years ago, revenue growth was above 50% even above 60% at some point.
Now, that number is much lower. Recently, growth has been closer to mid-teens. So, this is clearly not the same hypergrowth story anymore. And that matters because when a software company slows down, the market usually stops giving it a premium multiple. But the second issue is even more important. Revenue is expected to decelerate further.
If you look at the analyst estimates, the market is not expecting some big re-acceleration. It's basically expecting Veeva to keep growing, but at much more modest pace. So, from Wall Street's perspective, this is the company moving from high-growth software story into a mature phase. And once that happens, investors start asking different question.
Not how big can this become, but how much should I really pay for this growth? And the third issue is the CRM transition. This is a big one, actually. For many years, Veeva CRM was built on Salesforce. Now, Veeva is moving away from that and pushing customers toward Vault CRM, which is their own CRM product.
Strategically, that makes sense. It gives Veeva more control over its own platform and over its own future. But transitions like this are never risk-free. And the market is worried because not every customer will automatically move with Veeva. Some large pharma companies may decide not to continue the contract the same way, or may choose different path tied more closely to a Salesforce CRM.
So, even if the long-term strategy makes sense, the transition itself can create short-term uncertainty, and markets hate uncertainty. Then we get to the fourth issue, which is valuation. Yes, the stock is much cheaper than it used to be. If you look at the price-to-sales chart, price-to-sales has compressed a lot.
And if you look at the price-to-earnings chart, price-to-earnings also came down very hard from the old levels. So, clearly the stock has already been re-rated. But even after that, Veeva is still not some broken stock trading at crazy cheap multiple. You are still paying for very high-quality business.
And that's exactly the problem. Because when the growth slows down, when future growth is expected to slow down even more, and when you also have a major product transition happening, investors start questioning whether Veeva should still trade at premium multiple. So, the bear case is pretty simple.
Growth is slower, growth may slow or further, the CRM transition creates execution risk, some large customers may not move the way investors hope, and even after the sell-off, the stock is not cheap enough to make all those worries disappear. And honestly, that's not the crazy bear case. But this is where I think the market may be missing something.
Not all software is equal. And I think this is one of the biggest mistakes investors make during sell-off like this. They start throwing software companies into the same bucket. AI risk, multiple compression, pricing pressure, fear, and suddenly everything get treated like average SaaS. But Veeva does not look like average SaaS to me because the more regulated and mission-critical workflow is, the harder it's to replace.
If you are helping a company manage clinical workflows, regulatory documents, quality systems, and safety processes, that is very different from selling some simple productivity app. These are serious workflows. They are complex, they are regulated, and if something goes wrong, the cost can be very high.
That creates a real stickiness. It also creates trust. And trust matters a lot more in this kind of software. So, yes, AI may disrupt a lot of software, but I do not think AI can easily destroy a company like Veeva in the same way it could pressure weaker SaaS businesses. That's why I think Veeva may be much more resilient than people think.
Now, let's talk about AI risk because this is one of the main reasons why software stocks are under pressure. The market is scared that AI will make software easier to build, weaken most and put pressure on pricing. And for many software companies, the fear is fair. But I think we will maybe different because Veeva is not really competing in drug discovery itself.
What Veeva does is sit deeper in a workflow in the regulated part of the process. And here's why that matters. If AI platforms from companies like Amazon or Open AI help accelerate drug discovery, that could actually be a tailwind for Veeva. Let me explain. Because faster drug discovery means more drug programs.
More drug programs can mean more trials, more filings, and more regulated work. And that can lead pharma companies to work with Veeva even more. So in this case, AI is not the threat for Veeva. In this case, AI may actually help create more demand for Veeva systems over time. Now, the stock is down 40% from the high.
But let's have a look at financials of Veeva Systems to see is are there any red or yellow flags we can see from the perspective of numbers. Revenue, income, and free cash flow chart is absolutely stellar. All metrics are going up to the right. Very profitable company with gross margin of 75% operating margin and income margin of 25% and free cash flow margin close to 40%.
One of the thing investors are complaining is a high stock base compensation for Veeva platforms. And I can see what they're complaining about. You see, stock base compensation is relatively high relatively to free cash flow. The balance sheet for Veeva Systems is as beautiful as it gets. The company basically does not have any debt and almost $7 billion in total cash and cash equivalents.
Absolutely outstanding balance sheet. The earnings history for Veeva Systems is absolutely stellar. For the for the historical earnings, Veeva never missed analyst expectations and always beat EPS estimates. Let's run a projection on Veeva Systems to understand which return investment we can expect for the next 5 years if we invest into the company today.
Currently, the growth for Veeva is a 16% but the management is expecting deceleration. So, let us model 12% which is relatively conservative scenario for Veeva Systems. For net income margin, we will keep 30% which is close to current margins. And for the price to earnings, I believe the growth slowing down the 31 price to earnings is not deserved.
So, we'll assign 25 price to earnings. In this case, we can expect 50% upside over the next 5 years or 8.41% CAGR. It's always important to run multiple valuation metrics, projections, look at the multiples, and also reverse DCF. The reverse DCF is showing implied free cash flow growth for the company over the next 10 years.
And for Veeva Platforms, it's 7.31% Meanwhile, I will remind you that revenue is expected to grow in average around 12% for the next 5 years. So, in this case, based on a reverse DCF valuation, I would say that Veeva is trading at discount right now. Now, final thoughts on Veeva Platforms and if I'm going to follow Michael Bury on this trade.
I think Veeva is one of the most interesting software stocks in the market right now. Not because it's some broken deep value play and not because it's a risk-free, but because the market may still be treating it too much like a normal software as a service company. And I do not think it's normal SaaS company.
This is the vertical software business with deep roots in life sciences. It operates in complex and regulated workflows. It has a real stickiness. It has a real cash flow. It has a strong balance sheet. Know that. And that makes it much more resilient than many software names in the market right now.
So, my view is pretty simple. I do think the market is right to be cautious on a lot of SaaS stocks, but I also think Viva may be one of the few names where that fear is being applied too broadly. To me, Viva looks like a stronger business than the market is giving it credit for. Based on the reverse DCF, Viva looks undervalued.
Based on the multiples, I would not say that Viva is at level of dirt cheap of a company. And based on my projection, which I would say probably on a bearish side, I can expect 50% upside on the next 5 years, and I have a better candidate. But if software-as-a-service companies continue to go down, Viva would be one of the first candidate I am preparing to buy the dip on.
But this is just my view. Do you think Viva is one of the few software companies that can really handle AI disruption? Or do you think the market is still right to stay cautious here? Let me know in the comments. And if you enjoyed the video, subscribe to the channel for more deep dive stocks analysis like this. .
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