Tech stocks have been hammered this year, and it's only January. The Nasdaq is down almost 12% year to date, which is officially in correction territory. Investors who invest in high-growth stocks have had a rough start to 2022, but that also means tons of quality stocks are on sale today.
Doximity (DOCS -0.77%) is one of those investments that has fallen sharply from its all-time highs. After its IPO in June 2021, investors piled in and the stock skyrocketed. Alongside the tech sector, it has fallen back to Earth, dropping 13% year to date and is now down 57% from its all-time high. Despite this recent volatility, Doximity is the leading app for healthcare professionals in the U.S. with over 1.8 million medical workers on its platform. With such a large discount on Doximity's stock now, investors might want to consider adding this market leader to their portfolios. Here's why.
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A doctor's most valuable app
Doximity has become a super app for healthcare professionals -- including nurse practitioners, physicians, and doctors -- for everything they need to do their jobs better. Doximity has a telehealth service, secure messaging for doctors to communicate with patients and colleagues, and a personalized newsfeed with information on the newest practices and innovative drugs. Doximity's app also has a career page where medical students and professionals can network and find job opportunities.
Doximity's value is evident in the fact that more than 80% of all healthcare professionals and 90% of medical students use the app. And this population is a hugely valuable audience for advertisers, with medical professionals directing 73% of the $4 trillion in annual U.S. healthcare spending.
Now, let's talk monetization. The company primarily makes money from pharmaceutical companies advertising on its newsfeed. Drugmakers want to get their products in front of healthcare workers who make prescribing decisions. With so many doctors on the platform, advertisers are willing to spend big -- and Doximity benefits immensely from that. In the most recent quarter ending Sept. 30, 2021, the company brought in revenue of $79 million -- growth of 76% year over year -- driven by the 30% of advertisers that spend over $100,000 per year in revenue with Doximity.
This stock's major edge is its network effect. The more users who join the app, the easier it is to connect with peers and potential employers for career growth and collaboration. As the dominant app, Doximity offers the best value proposition for everyone working in the medical field. In other words, Doximity becomes more valuable to users as more people join the platform, and this increased penetration makes it even more valuable to advertisers.
Expansion into new markets
What is very impressive about Doximity is that it is a cash-generating machine. The company had 45% income margins in its most recent quarter resulting in $36 million in net income. In the first six months of its fiscal year -- from March 31 to Sept. 30, 2021 -- the company also generated a free cash flow of $50 million.
Doximity sees a market opportunity of $18.5 billion, with the bulk coming from increased advertising revenue. The company only has 600 advertisers despite there being thousands of companies that would be interested in marketing to this audience. The company's main growth strategy is to spend more to attract these customers and deepen relationships with its existing clients. The company has already been seeing success on this front: In the most recent quarter, the company had a net retention rate of 173%, meaning that existing customers spent 73% more than they did in the year-ago period.
However, there are risks that come with buying Doximity's stock. One customer represented 12% of revenue and 25% of accounts receivable in its last fiscal year, so if that customer were to leave, Doximity could feel some pain. With a dominant market share in the U.S., Doximity could struggle to keep up its rapid growth. To that end, it plans to expand into new sectors in the healthcare arena such as with dentists and physical therapists, but if it's not successful, its growth potential shrinks. Further, advertising is a very cyclical industry, so the company could also see a decline in revenue if a recession hits and businesses cut back on their ad budgets. Given its short history as a public company, it will take time for investors to become confident in management's ability to lead throughout different market conditions.
Doximity is worth the premium
This market leader with no major competition has an incredible network effect that should help it keep dominating unless a disruptor comes out from the shadows. Doximity's impressive revenue growth, profitability, and free cash flow generation make its stock incredibly appealing to me. Its future growth is still a question mark, but if the company can expand into different healthcare markets while increasing its advertisers and their spending, Doximity could see major growth for the next five years.
Currently, Doximity's valuation is still high at 31 times sales, but this is also the lowest it has ever been. Considering that Doximity's valuation and price are both at an all-time low, now is a great time to start a new position or bolster an existing one. However, because of its high valuation, it might be wise to dollar-cost average by buying shares over time. With this strategy, if the company's valuation continues to fall, you can take advantage by locking in a lower average cost basis. Keep in mind that this is an early-stage story, so even risk-tolerant investors will want to keep Doximity to a small position in a diversified portfolio, and add to it if the growth narrative proves to come true.
