Veeva Systems: A Wonderful Company; Use This Option Strategy To Achieve Even Better Returns

Updated: Apr 15

Introduction

Investing in reliable high-quality growth companies has undoubtedly paid off over the past decade. Although I believe we should remain cautious on the current stock market valuations, tweaking our risk/reward profile via option strategies allows us to still cherrypick the best-in-breed but richly valued growth companies.


One of them is Veeva Systems, a cloud-computing life sciences company which sports a 2% FCF yield based on the current market cap and its comfortable net cash position. Whilst that is seemingly far from exciting, there's a good reason why shares are trading at elevated multiples: earnings consistency during this coronavirus-crisis.

(Source: Marketscreener)


The fact that the stock price is trading near all-time highs suggests one clear thing: smart money is flowing into this generational winner.


Firing On All Cylinders

Moreover, Veeva's compelling growth story is not running out fuel. According to a recent report, the global healthcare cloud computing marketis estimated to grow by $25.5 billion, or 23% annually over the next four years. While Veeva's revenue growth is expected to slow down a little (25% YoY), it still boasts 35%-40% free cash flow margins.

(Source: Author's Calculations)

(Source: Author's Calculations)


Option Strategy

1) Covered Call Writing

With volatility at the high end of its historical norms, a simple at-the-money covered call write on Veeva Systems results in an immediately lowered breakeven point and juicy maximum annualized return of 13% (based on a $162.85 stock price).

(Source: Option Generator's spreadsheet)

(Source: Option Generator's spreadsheet)


2) Actual Strategy

Nonetheless, there's more cream to ice the cake with. I'm bullish on VEEV and have a $200 target price for January 2021 (22% upside potential from here). Now, it's still possible that shares remain below that threshold since I don't have a crystal ball as to what might happen next. If that's the case, my goal is to outpace the buy and hold investor and generate 20% in a rangebound market.


Therefore, let's combine the covered call write leg with another setup. Our net cash investment stands at $16,285 for the 100 shares minus the $2,450 premium received, plus the $9,050 cash investment of this option setup. In total, that leaves us with a net investment of $22,885.

(Source: Option Generator's spreadsheet)


Based on 34% implied volatility, which is the historical mean for VEEV options, we get the following results (on January 15th, 2021).

(Source: Option Generator's spreadsheet)

(Source: Option Generator's spreadsheet)

(Source: Option Generator's spreadsheet)


As you can determine from the graph above, a significant return can be achieved by implementing this strategy. It would take a 22% surge in the share price for you to get behind the buy and hold investor. This sounds like a great deal to me given my neutral to slightly bullish view on the overall market. Our breakeven point lies at $135, or 18% below current market value.


If volatility shoots up to 40% (which could always occur given the lingering economic troubles), the strategy would benefit even more. In essence, it does also provide a meaningful hedge if VEEV would drop by - let's say - more than 20%.

(Source: Option Generator's spreadsheet)


Conclusion

I'm bullish on VEEV, but should the stock remain stagnant for the coming months, I'd like generate a sizable profit by implementing the complex option strategy. We get downside protection and outpace the buy and hold investor as long as its share price does not exceed the $200 threshold, which represents my price target over the next 280 days. On January 15th 2021, we're going to evaluate our position and act as appropriate for the months thereafter.

Option Generator AM

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