Breakdown of Two Hidden Industry Leaders

July 17, 2023

Author

Wiko Steyn

Core Fund Update 2: #7 of 20 stocks added. $VEEV $AXON

FU Investments has initiated two more starter positions in our Core Fund. These are two really interesting companies and they differentiate themselves from our first 5 picks by having a much smaller Market Cap. Axon Enterprises has a Market Cap of only $8B and Veeva Systems $28B. You may wonder how we can allow these two Mid-Cap companies into our Core Fund? Well, both are their respective industry leaders and they comply with all our qualifying metrics. Veeva Systems scored an 83 and Axon an 78 on our Core Fund Scorecard.

Let's take a deeper look into these two companies.

Veeva Systems

Company Overview

Veeva Systems provides a cloud ecosystem for life sciences, consumer goods, chemicals and cosmetics. Veeva strives to remove inefficiencies in these niche markets, with the ultimate goal of bringing innovative and quality products to market faster without compromising industry-specific functionality or regulatory compliance.

Moat (18/20)

Veeva is essentially a Salesforce Customer Relationship Management (CRM) platform for life science companies. Their niche domination gives them a competitive advantage. As the vertical leader in this industry, they certainly have a strong brand, high switching costs and a network effect. Veeva has an impressively wide moat and it is also in a positive trend.

Management (19/20)

Peter Gassner is the visionary behind Veeva Systems and the current CEO. He worked at Salesforce.com when the idea of a vertically integrated CRM for life sciences came to him. With over 30 years of experience at leading technology companies like IBM, Peoplesoft and Salesforce, Peter has been at the forefront of major transitions in enterprise software and the visionary behind some of the greatest enterprise platform software. Matt Wallach is the co-founder of Veeva and served as the president until 2019, currently, he is a director on the board. Matt helped build this company into the successful growth story it is today, and many of Veevas early customers came from Matts network. This company is still founder-led and insiders have a lot of skin in the game, they currently own 9.5% of the company or more than $2.6B. Although not essential to be considered for our Core Fund, we do love to see this.

Financials (18/20)

Good Gross Margin Rate of 73%
Exceptional Balance Sheet with $2.38B and almost no debt
Free Cash Flow positive
A relatively high Return On Equity of 16.51%
Good growth on the top and bottom line

Business Model (18/20)

Veeva can be seen as one of the pioneers of a vertical Software-as-a-Service (SaaS) business model as they were one of the first industry-specific clouds. Veeva was built on a reverse churn strategy from the start. It is built on top of Salesforce's CRM platform and this partnership is still ongoing. The partnership enabled Veeva to quickly build CRM products customized to life sciences. The life sciences industry is relatively recession-proof, which might be an important factor to consider in the current economic environment in the USA. The majority of the company's revenue is recurring. Veeva's customer acquisition cost (CAC) is not the lowest but its sticky business model has ensured that they have a high Net Retention Rate (NRR).

Future Growth (15/20)

This is definitely still a growth story, with Veeva adding new products regularly and attracting new customers. Veeva is expected to grow at a CAGR of more than 15% over the next 3 years and we predict this trend to continue for a long time. It has only penetrated 14% of its Total Addressable Market (TAM) and it still has strong optionality in the future.

Risks (6/20)

Although Veeva might be the leader there is still a lot of competition
Customer concentration is a potential problem, but it has improved tremendously
The company's valuation is still high with a forward P/E of 45.25 and a P/S of 13.22

Axon Enterprise

Company Overview

This company can be best summed up by its simple yet straight-forward mission statement:

To protect life.

It started as TASER in 1993 but it has expanded far beyond only tasers. Axon now operates globally under two main divisions TASERS and Software & Sensors. It provides law enforcement with all the tools they need to focus on their jobs and make the world a safer place.

Moat (18/20)

Axon has the same three moats as Veeva Systems: switching cost, brand and network effect. The comprehensive suite of software and hardware product has made it difficult for any competitors to threaten their market share. This suite has become mission-critical to law enforcement and the brand name TASER is basically a monopoly.

Management (16/20)

Rick Smith is the Founder and CEO of Axon Enterprises. This is another business success story with its origin inside a garage. Under his leadership, Axon has transformed into a market leader in non-lethal weapons, body cameras and software. Rick was the winner of the Ernst and Young 2002 Entrepreneur of the Year. Insiders still own a decent amount of shares, 5.1% or $402.3M. Again it is great to see a founder-led company with skin in the game, we are sure it played a crucial role in returning over 20,000% increase in share price over the last 20 years.

Financials (15/20)

Exceptional Balance Sheet with no debt
Free Cash Flow positive
Net Income Margin is still negative
Gross Margin of only 63%, which is not quite as high as we want it

Business Model (17/20)

Although the physical products they provide like tasers and bodycams have shown tremendous growth, what we like even more is the software side of the business. They now provide a full software ecosystem for the police department and other security companies. Their hardware products seamlessly integrate with this software, creating an indispensable tool for law enforcement. This business is definitely in recession proof and most of its revenue is recurring. We deducted points for high customer acquisition costs.

Future Growth (17/20)

Axon continues on its global expansion spree. There is a massive untapped TAM and they are still spending big on R&D. Although the stock price is already massively up we see the growth continuing for the foreseeable future. Operating leverage should also improve as the company slows down their expenditure on sales and R&D.

Risks (5/20)

Another quality company with a very high valuation, with a P/E of 57.2 and a P/S of 7.61
High stock-based compensation
Competition from Motorola and Digital Alley

Portfolio Update Summary