Catalyzed by rising costs and the fallout from the COVID-19 pandemic, the healthcare industry is investing heavily into digital solutions, especially in the U.S., where healthcare spending has reached a whopping 17.7% of GDP. Healthcare IT spending was estimated to be $74.2 billion globally in 2020 and is expected to grow at a compound annual rate of 10.7% through 2028. One company taking advantage of this trend is Doximity (DOCS 1.98%), a professional medical network for physicians that recently went public in June.
Should you buy Doximity stock?
LinkedIn for medical professionals
Doximity is a mobile application and digital network for healthcare professionals, mainly focused on physicians. According to its pre-IPO filings with the Securities and Exchange Commission, 80% of U.S. physicians and 1.8 million total medical professionals use Doximity. The network allows members to collaborate with colleagues, coordinate patient care through a single digital platform, find career opportunities, and see relevant news from the medical community. It also has a telehealth service called Dialer that allows members to conduct phone calls and video chats with patients.
If the application is free, how does Doximity make money? Like other social networks, Doximity has an advertising business. Pharmaceutical companies and healthcare systems subscribe to Doximity's marketing solutions to promote products and job listings to relevant candidates. Essentially, companies want to advertise on Doximity to get in front of the people (physicians) who will decide whether to use their products or prescribe their medication to patients. The top 20 largest pharmaceutical companies and top 20 healthcare systems/hospital companies by revenue all advertise on Doximity.
The financials look great
Doximity has put up stellar financial results in the years preceding its IPO. For the year ending March 31, 2021, revenue grew 78% to $207 million, with 93% of revenue coming from its subscription marketing solutions (the other revenue comes from its Dialer telehealth service). In fiscal year 2021, 29 customers contributed more than $1 million in revenue for Doximity, and 200 customers spent more than $100,000 on the platform. These high-spending numbers show how valuable getting information in front of the million-plus professionals on the platform is for pharmaceutical and healthcare companies.
In fact, the majority of Doximity's revenue growth comes from its existing customers, with a 153% net revenue retention rate (measuring the revenue growth from existing customers) last year. Doximity is also highly profitable, generating $14.1 million, $22 million, and $78.4 million in free cash flow during each of the last three years, respectively. With gross margin close to 90% and an asset-light model, Doximity's business is set up to have incredibly high profit margins.
The valuation, on the other hand...
The company's financials looked great, but right now, Doximity's stock is trading at an uber-premium valuation. With a market cap of $10.5 billion, shares trade at a trailing price-to-sales ratio of 50.7, which is higher than almost every other stock on the market. With $78 million in annual free cash flow, Doximity's price-to-free cash flow ratio is 134.6. Again, this is higher than almost every other stock trading today. If you're an investor in Doximity, you should be expecting strong revenue and earnings growth for at least the next few years, if not longer, as the stock's current price is reflecting strong forward expectations from existing shareholders.
Should you invest in Doximity?
Doximity is clearly a great business that has carved out a defensible niche in the healthcare industry. But with the stock trading at such a nosebleed valuation, it is probably smart for investors to wait patiently with this new IPO. The company could continue to grow at this rapid pace and fulfill all these lofty valuation expectations, but with 80% of physicians already on the network, the company is going to have to push into new medical verticals or different products to continue growing revenue. That, or convince its customers to pony up much more in advertising dollars over the next few years.
This isn't impossible, but it does add execution risk to the company going forward. Unless you believe Doximity can rapidly grow its sales and free cash flow over the next few years, the stock looks too expensive to buy at current prices.