Doximity: Turning Bullish After Stock Price Correction

Summary

• Doximity (DOCS) is a high-quality company which we previously covered. At the time we came to the conclusion shares were too expensive.
• Since then shares have been almost cut in half, bringing us to ask ourselves if now is the time to start investing in the company.
• Now it has a more reasonable valuation, we will explore if a case can be made for a starter position at current prices.

Solskin/DigitalVision via Getty Images

Doximity (NYSE:DOCS) is a high-quality company that we previously covered. At the time we came to the conclusion shares were too expensive. For those not familiar with the company we recommend going back to that article, where we go into more detail as to what the company does and why it is an interesting platform.

Initially, we looked like complete fools, since shares gained almost 50% after we said we were not willing to buy at the then current price of ~$77, however since then shares have been almost cut in half, bringing us to ask ourselves if perhaps now is the time to start investing in the company.

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Financials

Doximity went public at $26.00 per share and has so far never dropped below its IPO price. According to a recent Barron's article using Renaissance Capital data, three quarters of 2021's IPOs are now trading below their offering price. Of the few winners, Doximity is currently the one that is trading with the biggest gain, at ~100% gain from its IPO. While that makes it less likely that shares will be a bargain, it does speak to the quality of the company that it is one of the few 2021 IPOs with gains after the market rout.

Data by YCharts

There are a few things in Doximity's financials that we particularly like. It has very high gross profit margins which hover around 88%, has demonstrated operating leverage, and is now solidly profitable.

Data by YCharts

The problem we still have is the price tag, with the company sporting a market cap of ~$10 billion. This is a lot better than when it was trading at roughly $20 billion, but we have trouble paying so much for a company that still generates modest profits. That said, the valuation is starting to make some sense and we believe a case can be made for a starter position at current prices.

Data by YCharts

Valuation

Taking a look at the revenue multiples we see that the company is now trading with a trailing twelve months EV/Revenues of ~29x, and a forward EV/Revenues multiple of ~20x. This is still far from cheap, but at least the company continues to grow revenues at a very rapid pace and is already profitable. It might actually grow into its valuation in a couple of years if it continues on the current path.

Data by YCharts

One thing to note is that revenue growth has been decelerating. About a year ago the company was growing revenues at ~100% rate, and it has now decelerated to about 67%. This is something to monitor, since a continued deceleration could change our thesis, and make the company a lot less appealing than it currently is.

Data by YCharts

Focusing our attention on earnings we see that shares are currently trading at more than fifty times expected earnings in 2024. That is a very high multiple for something that is expected to happen in two years. Still, given the growth and the quality of the company, it can grow into its valuation and if growth continues at its current rate paying such a high multiple can be justified. The big question is how long the hyper growth phase will last, and we do not have the answer to that. That is why we plan on buying a very small position and to be more aggressive should shares fall to a real bargain level.

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Risks

There are a few risks worth considering before investing in Doximity, chief among them is the risk that revenue growth will continue decelerating at a fast pace. We believe the company has attractive platform economics, and therefore profitability should not be too much at risk unless the platform becomes unattractive and users flock to other alternatives like LinkedIn. LinkedIn is much more generic and not tailored to medical professionals, but should they make a serious effort to cater to their needs, this could be a serious risk too.

Conclusion

Doximity is an attractive platform that we would like to own a piece of, but the price remains elevated. We are changing our rating from "Hold" to "Buy" following the significant price decline since our previous article, coupled with continued growth from the company. Together these two factors have brought the valuation close to reasonable, and we will consider a starter position at current prices. This is a great company and hopefully we'll get the opportunity to buy at more attractive prices.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in DOCS over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling shares, you should do your own research and reach your own conclusion, or consult a financial advisor. Investing includes risks, including loss of principal.

Comments

[ding dong]

There is no growth. They guided to lower revenues. And still too expensive for value investors.

[rootbeer1]

@ding dong FY23 revenue expected 450mil from 343mil FY22. that's called growth/sales

so if they hit that i mean we are talking rather expansive sales within the year and following back to previous years they grew very well. balance sheet is healthy, no debt, plenty of growth. im buying on weakness. listen to the recent conference call and you'll see why the stock bounced back within a day of the headline. You will pay a premium for this growing cash flow machine

[ding dong]

Possible they may grow again. But their guidance for next quarter is not of growth. And its more likely in the current environment for the medium term to follow the short term and show no growth. With a P/E of 45+ you are taking on more risk gambling that they will grow. I am willing to take the gamble too, but at a lower risk, i.e. at a lower P/E and lower price.

[alphatraz]

Still expensive if you're a value investor. But the growth-relevant numbers are all good. IMO this comes down to whether or not they add new revenue streams

[CNY Investor]

I'd like to hear from someone that's a DOCS subscriber and regular user. What features do you use/value the most? In comparison to other alternatives, does DOCS have a sustainable moat against the competition?

[DrILoh]

@CNY Investor Let me keep this brief. I have been using Doximity since 2012. In my estimation, it has no real competitors. For one thing, the credentialing to get on the platform is incredibly rigorous and cross checked. On LinkedIn, you are who you say you are. Doximity cross checks and verifies. That being said, about 80% of US physicians are on the platform, although the majority are probably not active users. The advantage is that when I am seeking to make referrals for patients who either move or are visiting other areas, I can reliably ascertain the credentials of potential providers to whom I can refer confidently. Another thing which is adds to Doximity’s professional utility is that it pushes relevant clinical and researcharticles germane to one’s specialties or interests to you, thus providing value in getting information that one otherwise might miss. This is on top of the general medical news stream which is presented in a timely and relevant fashion. And there is the ability to communicate with colleagues securely. Last, I also use its telemedicine platform and secure fax services every day when conducting virtual consultations and requesting HIPAA compliant secure information. You bet I have this stock. Hope this helps.

[djh_van]

@DrILoh That was really helpful for me understanding the company, so thank-you.

If I could ask one question if you don't mind: what's the single most useful feature in Doximity that you and/or your peers depend upon? I get the whole social side and the telemedicine side, but I just want to understand the #1 feature that makes this product "sticky" to healthcare professionals, and without that feature, would you consider the product still good, OK, or a no-no?

Thanks.

[Danjw2]

I do wish we could get a Quant rating on this stock.