Bought the right company at the wrong price

In my early days of investing, I often picked up great companies; Companies with amazing product, management, brand recognition, market share, etc. And those companies performed, as expected, really well. But that didn’t translate into good returns. Only because I paid too much for them. And this is one of the most common mistakes that early investors make.

But the good part about making these mistakes early on is that you don’t lose much. And if you decide to rub your nose into these mistakes, you can learn a lot from it. So today, I want to share & document one such mistake: Veeva Systems.

Investment thesis :

Veeva systems is one of many SaaS company but with a very differentiated & sticky product. Its founder recognized specific needs of Biotech, Biomedical, life sciences and pharma companies that other CRM companies couldn’t provide and filled those gaps. It soon became a giant in a small market with a great recurring revenue. This translated into a an extremely profitable & predictable company with very low capex requirement, lean size, almost no debt, good ROIC and awesome management. The only thing that pinched me a little was its annual dilution due to its stock based compensation.

Outcome:

Overall it looked like a great pick and I couldn’t wait to buy it. So I bought Veeva stock at market cap $17B in 2019. And as I predicted, the company performed phenomenal over the last 4 years. It’s EPS grew by 271% in 4 years; From $1.28 to $3.47. Yet my investment in it only grew by 58% in the same time period. Why?

Well turns out that I failed to focus on one of the most important thing: price. I bought the company at the P/E ratio of 75. I completely disregarded the valuation of the company. Thankfully, I lucked out. The position wasn’t that big and I didn’t lose capital in this investment. But it has been one of my “Best picked, worst Investment” since I started my value investing journey.

My Learnings:

– Valuations matter, no matter how great of a company it is.
– Be patient. If you end up discovering a great company, wait for the price that gives you enough margin of safety. Investing is a slow game. There is no need to rush into it.
– The performance of the company and performance of the stock, even though highly correlated, can diverge for a long time. And for the right reasons.
– P/E compression can kill your investment.

Making mistakes is a part of the value investing journey. Learn and earn from them.

Disclaimer: I still have a position in Veeva systems and this is not an investment advice.