Why we sold 1/2 of Veeva Systems
We have recently sold half of our holding in Veeva Systems (VEEV), reluctantly.
Although we have not a single doubt about the quality of the business and it's strong management, it became increasingly clear that the valuation was getting ahead of itself.
The current market capitalization is 19 billion $. Anno 2018 the summarized financials were:
- Revenue of 860 million $.
- Net profits of 229 million $.
- Free Cash Flow of 302 million $.
- No debt.
Historically, the company has grown at around 25%+, which is extraordinary. It seems that this company has the right business model and that has justified many years of extraordinary share price growth (which happily benefited us).
Yet, although we think these growth rates will likely continue in the future, the investor should keep in mind the rationality of the prices that are offered to him by the market. We learned this from Benjamin Graham in his quintessential "The Intelligent Investor" (our review here), where he wrote in chapter 8: "Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to ... the operating results of his companies.".
Warren Buffett would say: "The market is there to serve you, not to guide you".
If Mr. Market offers us 130 $ for a company that last year earned 2,6 $ pre-tax, then that company would be yielding us 2%, which is lower than US long-term government bonds, that are actually yielding around 2,8% and are risk-free. True, as the company grows at very high rates of return, it will catch up on these bond rates, but we would argue that there currently exists an increased price risk for the equity holder.
On the other hand, the company was bought last year because of some strong merits. We think the business model is solid, the management is intelligent and has integrity. A stock price of 58 $ at the time seemed fair to us. When it then shoots up to 125 $, we start reviewing things.
"But then why not sell the entire stake?", I hear you ask.
Because the company itself remains a gem. We believe that the company will keep on compounding. It is only it's market price that we think is currently overstretched. Hopefully, it's price will come down in the future, so we can start buying again, absent any calamities with the company.
In the past we have learned that it sometimes is wise to 'trim' a position, whenever the price shoots up to high levels.
We have done just that.