In the business world, there's Microsoft's (MSFT 0.09%) LinkedIn, and in the medical world, there's Doximity (DOCS 0.79%). The company's platform has not only allowed doctors across America to effectively grow their careers, but it has also enabled easier communication and modernized how doctors receive news about emerging treatments. 

Doximity makes communication between doctors easier than ever before, but there are questions about how much longer this business could grow. Doximity is already up 68%, and with its seemingly limited growth strategy, there might not be much room for investors to make money on this investment.

Doctor going over X-rays with patient on a telehealth call.

Image source: Getty Images.

The LinkedIn of healthcare

Doximity's platform has practically everything doctors need to network and communicate. Doctors can build their careers on this platform by being connected with other physicians on the platform, and medical students can begin to build their careers with its Residency Navigator and Salary Map. Doctors seem to love Doximity: 80% of U.S. physicians and 90% of medical students use Doximity. 

The company also offers telehealth, patient-to-doctor communication, and doctor-to-doctor communication, and it has created personalized news feeds for every doctor on the platform -- all of which result in better care for patients.

Doximity's customers are not the doctors on the platform -- which is free -- but the pharmaceutical companies that want to advertise on the company's newsfeed. Doximity's news feed allows doctors to catch up with the latest news in their specialization, but it also advertises new drugs on the market that they could potentially start using. 

With such a large user base on the platform, it should be no surprise that all 20 of the top pharmaceutical manufacturers advertise on Doximity, and the company made over $200 million in revenue in 2020. Manufacturers spending over $100,000 have been paying up for the chance to advertise on Doximity -- spending 67% more in the trailing 12 months than they did in the last TTM. This has grown consistently since 2019, when customers spent only 36% more. 

The price investors pay

Doximity has become the main communications platform for physicians and for drugmakers to advertise their products. Because of its strong dominance, investors have to pay up. The company has seen a meteoric rise from its June IPO, jumping nearly 60% from an already expensive valuation. Today, the company is trading at 54 times the company's 2021 revenue guidance and 149 times its 2021 adjusted EBITDA guidance. 

This valuation is steep, especially when compared to other healthcare businesses like Teladoc (TDOC 0.25%)-- which trades at 11 times forward sales -- or life sciences company Veeva Systems (VEEV -0.49%), which trades at 25 times forward sales. 

What's left?

The primary reason that Doximity's valuation is so high is because of its fast growth, but that could slow dramatically over the next few years. Doximity already has 80% of users on the platform, so the question is: How can they continue growing the user base for much longer? If the company cannot continue attracting more consumers, drug manufacturers might be less willing to pay so much for advertising on the platform.

One customer accounted for 11% of Doximity's revenue and 19% of its accounts receivable in the second quarter of 2021, and if that customer were to stop or decrease its advertising on Doximity because of the slowing user growth, the company could be hurt. 

Instead of trying to gain a 100% market share of doctors and medical students in the U.S., the company could potentially expand internationally or into new professions like law or law enforcement -- both areas where enhanced communication could improve the industry. The problem is that management does not seem to be looking toward these growth opportunities, which could be important ways in which it can expand its user base -- making advertising more valuable. 

Instead, it is using the company's strong free cash flow -- reaching $32 million in the second quarter -- and its $600 million in cash on the balance sheet to strengthen the platform's network effects to increase customers within the medical field.

While the company has a strong platform that has been largely successful so far, the growth opportunities that management is focused on seem capped, and because of its success already, there might not be much more it can do to expand its current user base. At such a steep valuation, the expansion opportunities should be much larger, and while the company has potential growth avenues, management does not seem to be focused on them. Until Doximity can find more sustainable, long-term growth runways, it is not worth paying up for.