The stock market has had one of its best decades ever, with the SPDR S&P 500 ETF providing 275% returns over the past 10 years. While this performance is extremely impressive, I believe there are two stocks that could outperform the market and provide multibagger returns over the next decade.
If you add Doximity (DOCS 0.65%) and DermTech (DMTK -7.50%) to a diversified portfolio, they could help you turn $100,000 into $1 million over the next decade. Here's how.
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Doximity: A doctor's social media
While many business professionals use Microsoft's LinkedIn, nearly 80% of medical professionals in the U.S. use Doximity. Doximity serves as a career growth app, a messaging app, an educational resource, and a social media platform all in one for doctors. In addition, Doximity offers telehealth accessibility, making it the super app for doctors and healthcare professionals.
Doximity has truly become a primary platform that medical professionals use. Aside from the 80% of doctors on the platform, 50% of nurse practitioners and physician assistants use it, and a staggering 90% of medical students use it -- signaling that Doximity will continue to be the place where medical workers should go to collaborate, communicate, and expand their careers. As a result, Doximity's platform has attracted lots of advertisers.
Doximity makes money from advertising revenue from pharmaceutical companies looking to show doctors their drugs on the research part of its app that delivers personalized news and research to doctors. Over 600 pharmaceutical companies are desperate to get their products in front of doctors and potential buyers, 200 of which spend over $100,000 per year to do so. What is most impressive is that Doximity's net retention rate is 173% -- meaning these customers spent 73 cents more in Q3 2021 on top of every dollar they spent in the year-ago quarter, including churning customers.
In addition, 93% of Doximity's revenue comes from subscriptions from pharmaceutical companies. Because of this focus on subscriptions, its gross margins are a lofty 89%. Another factor making this company a financial powerhouse is the 80% share of U.S, doctors already on the platform, which means Doximity does not have to spend a ton on operating expenses. This allows for Doximity to bring tons of cash to the bottom line: In Q3, it had $36 million in net income -- representing 45% of revenue. And as if this couldn't get any better, the company also generated $18 million in free cash flow in Q3.
In addition to this impressive profitability, the company has been able to consistently grow its top line at 76% year over year. It's not hard to see why shares trade at a staggering 184 times earnings and 36 times sales. However, this company has a dominant foothold in this market, with the majority of its consumer base on the platform, making advertising space nearly invaluable. This position has already led to growth and profitability, that I think could continue for the next decade.
DermTech: A different approach to skin cancer
DermTech is riskier than Doximity, but its growth potential is even larger. DermTech has created a new way to test for skin cancer that is easier, cheaper, and more accurate than the traditional biopsy. Instead of having a chunk of skin taken out, DermTech's PLA Test can simply be put on the area of concern like a bandage, and results are given within 72 hours. The chance of missing melanoma drops from 17% to 1% with DermTech.
Where DermTech has major growth potential is with its insurance coverage. While the company's product is not currently insured by the big insurance companies, it expects to obtain coverage in late 2022 or early 2023. If the company can get major insurance coverage, that could make it easier for doctors to switch over to its product.
Even without major coverage, the company is seeing impressive growth. Test revenue grew 140% year over year, and the company's sample volume reached 11,720, growing 75% year over year in Q3.
The company is nowhere near profitability, having lost almost seven times its revenue in Q3, but with just a $485 million market capitalization, it would be unrealistic to expect profitability at this stage. DermTech does, however, have over $204 million in cash and cash equivalents to subsidize its losses for some time. The company has only brought in $8.7 million in 2021, yet it has a market opportunity of over $10 billion. With such a large opportunity and a superior product, it is understandable that the company is valued at 40 times sales.
While its current valuation and unprofitability aren't appealing, the company could potentially grow its revenue by 100 times and still be scratching the surface of its addressable market. With this much potential, adding DermTech into a diversified portfolio could be a move that -- if it plays out -- could create portfolio-changing (and life-changing) results.
