Globally, the world had a record number of initial public offerings (IPOs) in 2021. According to a report from Ernst & Young, there were 2,388 deals worldwide, and IPOs in the Americas grew 87% year over year. Fourth-quarter 2021 was also the most active quarter for IPO deals since 2007.
With so many IPOs last year, it was extremely difficult to determine which companies stood out from the pack. So many high-quality tech stocks came public in 2021, along with plenty of other big names like Robinhood, but I have been focusing on one under-the-radar name: Doximity (DOCS -2.73%). Here's why I think this is a top IPO stock to buy this month.
Image source: Getty Images.
A doctor's super-app
Doximity came public in June of 2021, but it is appealing today because it has fallen massively. The company reached $100 per share in late 2021, but it then fell over 50% off its all-time high, and it is now trading around the price it IPOed at. With rock-bottom prices and a valuation of 36 times sales -- an all-time low --I think now is the time to take a look at this company.
Doximity has become an all-in-one app for doctors and healthcare professionals, offering everything they need to work, learn, and grow their careers. Its career growth section mirrors Microsoft's LinkedIn, but the social media app also has tools that allow healthcare professionals to formally communicate with both doctors and patients. Doctors can also stay up to date with the research tool that gives them information on the newest and most innovative practices and drugs on the market.
Doximity has gained a major market share: Over 1.8 million medical professionals use the app, which represents 80% of all physicians in the U.S. and 90% of all medical students. This dominance has resulted in a major network effect for the company.
If a new doctor or medical student were looking to join a professional social media network, it would be a no-brainer to choose Doximity over a competing service. Considering that this is the digital space where medical professionals go to grow their careers, they want to be on the platform where they can make the most connections. In most cases, Doximity is that place.
Why it's a top buy
Doximity makes the majority of its revenue from advertising revenue. The company sells ad space on its research page to pharmaceutical manufacturers looking to advertise their latest drug. Considering that doctors dictate how 73% of the $4 trillion annual healthcare spending gets spent each year, getting in front of doctors' eyes is incredibly important for drugmakers. When Doximity has over 1.8 million of them on its platform, it makes the advertiser's choice of where to spend an ad budget easy.
Doximity has 600 advertisers on its platform, and 30% of them spend over $100,000 per year on these ads. 5% of them even spend more than $1 million. This incredible reliance on Doximity from advertisers has led to amazing profitability and growth. In the recent quarter, customers spent an average of 73% more than they did in the year-ago quarter, resulting in top-line growth of 76% year over year.
Another impressive thing to note about Doximity is its profitability. The company is a cash cow, bringing 45% of its top line to the bottom in net income while generating over $50 million in free cash flow in the past six months. Not many companies can combine strong profitability with high growth, so Doximity's ability demonstrates its exemplary capital allocation skills. When you consider this along with the fact that shares are priced near an all-time low, this company is extremely appealing.
The risks in buying a dominant company
There is a lot to like about this company, but there are some risks. It might not have much more room to expand and make its app more valuable to advertisers. With over 80% of healthcare professionals on the platform, Doximity cannot simply double its user count to make its platform more appealing to advertise on. Instead, the company might have to add features to the app to increase engagement, which will be a harder task. If Doximity cannot do this effectively, the value of advertising will stagnate and revenue could plateau.
Doximity is trading at all-time low valuations, but these valuations aren't cheap when compared to other companies. Other social media stocks like Pinterest (PINS -0.52%), for example, trade at just 10 times sales -- a quarter of the 36 times sales Doximity trades at. Even though the company has a 45% net income margin, Doximity trades at a staggering 186 times earnings.
No investment will come without risk. It is usually a good sign when a company's biggest risk is that it is too dominant in its category. Even when considering this risk, the financials for the company demonstrate that it has still found ways to grow. It isn't often that you come across a high-growth business with such impressive profitability, which is why I would consider paying its high premium. The company also has a strong competitive advantage, which is why Doximity is one of my top IPO buys to kick off 2022.
