Veeva Systems Inc.'s (NYSE:VEEV) price-to-earnings (or "P/E") ratio of 57.3x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 16x and even P/E's below 8x are quite common.  Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.  

With its earnings growth in positive territory compared to the declining earnings of most other companies, Veeva Systems has been doing quite well of late.   It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors' willingness to pay up for the stock.  You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.    

See our latest analysis for Veeva Systems

NYSE:VEEV Price to Earnings Ratio vs Industry January 18th 2024

Want the full picture on analyst estimates for the company? Then our free report on Veeva Systems will help you uncover what's on the horizon.  

Does Growth Match The High P/E?  

Veeva Systems' P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.  

Taking a look back first, we see that the company grew earnings per share by an impressive 39% last year.    Pleasingly, EPS has also lifted 54% in aggregate from three years ago, thanks to the last 12 months of growth.  Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.  

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 10% each year over the next three years.  That's shaping up to be materially lower than the 12% per year growth forecast for the broader market.

In light of this, it's alarming that Veeva Systems' P/E sits above the majority of other companies.  It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen.  Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.  

What We Can Learn From Veeva Systems' P/E?

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Veeva Systems currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market.  When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower.  Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.    

We don't want to rain on the parade too much, but we did also find 1 warning sign for Veeva Systems that you need to be mindful of.  

If you're unsure about the strength of Veeva Systems' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.