Broken Growth Stocks: Doximity

May 21, 2022 12:01 AM ETDoximity, Inc. (DOCS)10 Comments16 Likes

Summary

  • The fifth article in our Broken Growth series focuses on a founder-led company.
  • Doximity is a targeted social media platform with approximately 80% of all U.S. providers, including doctors, nurse practitioners and physician assistants.
  • The company counts the top 20 hospitals and top 20 pharma companies as customers and grew revenue by 66% to $344 million in fiscal 2022 ending March 2022.
  • This idea was discussed in more depth with members of my private investing community, Inside Arbitrage. Learn More »

Shot of a doctor using a digital tablet during a consultation with a woman

LaylaBird/E+ via Getty Images

This is the fifth article in our Broken Growth series that we launched in January with an article about Coursera (COUR) and more recently wrote about Netflix (NFLX) last week. The company I want to discuss today follows the same heuristic discussed in our article about Coursera, which is to focus on founder-led companies.

Numerous studies including the one discussed in this article, point to the outperformance of founder-led companies. Investors have sometimes bid up these companies in the hopes of finding the next Jeff Bezos or Elon Musk and we were in a phase last year where it was Growth At Any Cost (GAAP) with no concern about the price paid for that growth. We have firmly moved from GAAP to non-GAAP territory now with this bear market.

Doximity (NYSE:DOCS) is a founder-led high growth company that has pulled back significantly in recent weeks. When I discussed this company in the Inside Arbitrage Special Situations Newsletter in February, I mentioned that it would be best to scale into a position over time given market volatility, especially as it relates to growth names.

Company Overview:

Doximity, a social network geared towards doctors that also offers telehealth tools for providers, was founded in April 2010, and went public on June 24, 2021. In the healthcare services world doctors, nurse practitioners and physician assistants are collectively referred to as "providers". Doximity is colloquially known as the “LinkedIn For Doctors” and is the leading digital platform for medical professionals counting approximately 80% of all physicians across the US as members.

Doximity specializes in providing a suite of tools and features to their members including a telehealth feature called Doximity Dialer. This feature allows doctors to not only host video calls with their patients, but they’re also able to securely call patients through their personal phone number, and have it show up as the clinic’s number. In the quarter ending March 31, 2022, 350,000 unique active providers had used Doximity’s telehealth tools. Doximity also allows doctors and other providers like Nurse Practitioners to have their own “profiles,” similar to that of a social media platform, containing their credentials, educations, and other relevant information. On the latest earnings conference call, CEO Jeff Tagney mentioned,

Speaking (of) which, our last and most important highlight is that our network continues to grow, with over 80% of U.S. physicians and half of physician assistants and nurse practitioners, we surpassed 2 million registered members last quarter, and we did so in half the time it took us to get the first 1 million.

Medical practitioners can easily refer their patients to other clinics and specialists, all through Doximity. Doximity keeps a record of medical news and journals published, filled with information about new treatments and drugs, and then uses data science to specially curate feeds for doctors based on their field of study/work. Providers can use filters to identify articles that allow them to earn continuing medical education (CME) credits and read those articles. Co-founder Dr. Nate Gross does an excellent job of introducing the company and its platform in this product demo video.

Founders At The Helm:

Doximity was cofounded by Dr. Nate Gross, Jeff Tangney, and Shari Buck. Jeff Tangney had previously worked alongside Shari Buck and Joe Kleine to create the mobile app known as Epocrates, which went public in 2011. Epocrates was built in Tangney’s dorm room at Stanford Business School, and was a medical reference app. Built with a special drug information feature, the app allowed users to scan any pill with an imprint code or other characteristics and easily pull up more information on the drug. Epocrates was sold to Athenahealth for $293 million in early 2013. Dr. Gross had also founded Rock Health, alongside his Harvard Business School classmate, Halle Tecco. Rock Health was a fund geared to support and finance startups specifically in the digital health sector, where technology meets medicine.

We have previously discussed the heuristic of paying attention to founder-led companies and it is good to see that all three founders are still involved in the business. Jeff Tangney is the CEO of Doximity, Dr. Gross is the Chief Strategy Officer and Shari Buck is SVP People & Ops.

Doximity Founders

Company website

Business Model and Growth:

Doximity counts the top 20 hospitals and the top 20 pharma companies among its customers. Hospitals are interested in hiring providers on the Doximity network and pharma companies are interested in advertising to providers. The company's three revenue streams include Marketing Solutions, Hiring Solutions, and Telehealth Solutions. The Marketing Solutions allows companies to advertise certain content on the platform, and also grants companies access to Doximity’s database of healthcare professionals for either referral or marketing purposes. The Hiring Solutions grants access to Doximity’s database of professionals, but this time for recruitment purposes, while also allowing companies to share job postings on the network. The Telehealth Solutions contain the Doximity Dialer and other calling services described earlier. Both the Marketing and Hiring Solutions are accessed through a subscription service, which accounts for the majority of the company’s revenue.

Valuation:

Two of the big challenges growth companies have faced in the last few months have been deceleration of growth and a large decline in their valuation on account of higher interest rates. Increasing the discount rate from 8% to 10% in a discounted cash flow (DCF) model can swing the company's valuation from significant undervaluation to overvalued. When I built a financial model for Doximity earlier this year, I had projected fiscal 2022 revenue growth at 58% and 45% for fiscal 2023 ending in March 2023.

The company recently reported Q4 and full year fiscal 2022 results and revenue grew 66% to $344 million but their forecast for fiscal 2023 of 33% revenue growth disappointed the market and the stock fell in response. They had previously guided towards 58% revenue growth in fiscal 2022 and handily beat that guidance. It is possible that the company is sand bagging with their 33% revenue growth projection for fiscal 2023 or plans to shift its focus from growth to bottom line profitability.

I updated my financial model for Doximity using their income statement from the last four years and projecting those trends for the next six years. For fiscal 2023, I used their revenue guidance of 33% growth and a small decline in gross margin to 85%. As you can see below, I reduced the expenses as a percentage of revenue over time. The model assumes diluted shares outstanding will increase 5% a year.

Doximity Financial Model

Author

Plugging the EPS data from this model into the first six years of a DCF model and assuming an EPS growth rate of 19% in year 7, declining 5% a year through March 2032, an 8% discount rate and a 2% terminal growth rate, I get an intrinsic value of $45.99 per share. The stock currently trades well below that intrinsic value. A financial model or a DCF model is only as good as its assumptions and it's entirely possible that the future may unfold in a different manner.

Conclusion:

A company with founders at the helm that has built a targeted social network with approximately 80% of all U.S. providers and that counts the top 20 hospitals and top 20 pharma companies as customers is doing something right. Looking ahead I can see the company continuing to grow by building on its nascent telehealth platform, entering adjacent markets, tuck-in acquisitions in the digital health space and more importantly through international growth.

I hold a long position in Doximity in my personal portfolio and will be adding more to the position in the near future. I prefer not to average down on stocks, but in this case, given the volatility of the stock in recent weeks, it may be prudent to build a position gradually. Buying more over time is fine as long as that decision is made a priori or in response to general market conditions and not simply because the stock has declined and now appears even more attractive than your analysis initially suggested. The latter may point to a flaw in the initial analysis or business conditions that are probably deteriorating.

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This article was written by

Asif Suria profile picture
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Comprehensive tools and detailed analysis for event-driven investors

I am an entrepreneur and investor with a focus on event driven strategies including merger arbitrage, spinoffs, (legal) insider trading, buybacks and SPACs. I was one of the earliest contributors on Seeking Alpha and started publishing here in 2005. For more than a decade I have been writing every week about M&A and interesting insider transactions. My work has been mentioned in Barron's, Dow Jones, BNN Bloomberg and other publications.  

I have been an active investor for more than two decades and my background in technology has helped me built tools that inform my investing process, especially as it relates to event-driven strategies that require updated data and processes. The focus on my Inside Arbitrage service is to provide investors with the right combination of tools and analysis to help them take advantage of strategies that can perform well across market cycles.  

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Disclosure: I/we have a beneficial long position in the shares of DOCS, COUR either through stock ownership, options, or other derivatives. 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.

Additional disclosure: Please do your own due diligence before buying or selling any securities mentioned in this article. We do not warrant the completeness or accuracy of the content or data provided in this article.

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