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.

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