Vertical Software | Riches in Niches

🌈 Abstract

The article discusses the lessons learned from a short seller's report on Veeva, a successful vertical software company in the life sciences industry. It covers the key components of the short thesis, including the perceived small total addressable market (TAM), significant competition factors, and frothy valuation. The article then analyzes how Veeva was able to overcome these challenges and become one of the most successful software companies.

🙋 Q&A

[01] Small TAM

1. What were the main arguments made by the short seller regarding Veeva's TAM? The short seller, Suhail Capital, argued that Veeva's TAM for life sciences CRM was limited, and that strong international competition and large customers on competing products would severely limit the TAM that Veeva could actually capture.

2. How did Veeva overcome the TAM concerns?

• Veeva's TAM expanded over the years as the company found ways to grow, such as expanding into adjacent areas through acquisitions, creating additional products, and capitalizing on international opportunities.
• The article notes that vertical software often starts with a small TAM but has the potential to become much larger as more opportunities are captured.
• Veeva's current TAM is estimated at $20 billion, which it has only captured about 12% of, suggesting there is still room for further expansion.

[02] Competition

1. What were the key competitive factors that the short seller cited as limiting Veeva's growth? The short seller mentioned that:

• Some large pharmaceutical companies (20% of global pharma reps) were already on competing or homegrown tools and were unlikely to move to Veeva.
• Companies would start customizing Salesforce.com CRM to meet their needs, or Salesforce.com could focus more on the life sciences market and take share from Veeva.

2. How did Veeva perform against these competitive threats? Contrary to the short seller's predictions, Veeva was able to get most of the large pharmaceutical companies as customers over time, and Salesforce/homegrown tools were not a significant threat that limited Veeva's growth.

[03] Frothy Valuation

1. What were the key arguments made by the short seller regarding Veeva's valuation? The short seller argued that Veeva's revenue multiple at the time of the IPO was too high, especially since it was one of the only real profitable cloud companies at the time. They questioned how a "vertically limited value added reseller" like Veeva could have nearly a quarter of the market cap of Salesforce.com, the "world's largest enterprise cloud company".

2. How did Veeva's valuation and performance end up compared to the short seller's predictions?

• While Veeva's valuation may have been frothy at the time of the IPO, the article notes that the stock price took about 3 years to reach that level again.
• However, over a longer time horizon, Veeva has significantly outperformed the broader technology stock index (QQQ), with a 389% gain since its IPO close compared to 500% for QQQ.
• The article suggests that Veeva's high profitability and durable revenue growth have justified its premium valuation over time.

[04] Shorting Stocks

1. What are the key risks and considerations around shorting stocks? The article notes that shorting stocks is very risky, as the loss potential is unlimited if the stock price keeps climbing. It is typically done either because the stock is overvalued or the company is expected to perform poorly. However, good companies with good management can often find ways to grow into their premium valuation over time, making shorting based solely on valuation concerns very difficult.

2. How did the short seller's experience with Veeva play out? The short seller, Suhail Capital, admitted that they were wrong on several of their original points about Veeva, including the TAM, competition, and other issues. While they may have made some money in the short term as the stock price dropped, Veeva ultimately grew into its valuation and became a leading public cloud company, proving the short thesis wrong in the long run.

[05] Lessons Learned

1. What are the key lessons from the Veeva case that the article highlights?

• In the long term, a well-run business will find ways to succeed, even if it faces initial challenges.
• Vertical software companies can run incredibly efficiently, with Veeva taking nearly half of its revenue as profits.
• Vertical software may be harder to disrupt, so while growth might be slower, it can be more durable.
• A company's TAM is not static, and great management can find ways to expand it over time.