Doctors need to privately communicate with patients and other medical professionals, and Doximity (DOCS) stands ready to help them. With its app, healthcare providers can videoconference or trade clinical documents while complying with patient privacy rules. And because its product is a software, it's no surprise that investors are excited about the company's potential to grow rapidly and efficiently.

Nonetheless, this company has a couple of issues that people should know about, especially if they're considering an investment. In particular, there are two green flags and two red flags that investors need to understand.

A doctor giving a telehealth visit using a laptop holds up a pill bottle.

Image source: Getty Images.

Green flag No. 1: A highly repeatable and subscription-based business model

The first green flag for this stock is that Doximity's business model is simple, successful, and can easily scale up.

Doximity makes its money by selling monthly subscriptions for its app to clinical practices and healthcare systems. Its app is focused on helping clinicians provide telemedicine to their patients via phone or video call. Once physicians are subscribed, they can easily use the app as their telehealth interface with patients.

Aside from helping providers to maintain their privacy and providing a unified caller ID for all of the phone numbers associated with a clinic or practice, Doximity's application also has a directory of practitioners to consult for coordinating care and a tool for sending faxes.​ 

And customers pay for it month after month, which means that a large amount of the company's $277.42 million in trailing revenue is recurring. Management says its trailing net revenue retention rate was 173% in the second quarter of 2021.

In short, the net revenue retention rate is the rate at which existing customers spend compared to how much they spent in the prior time period; if every customer spent exactly as much in one year as they did in the next, it'd be 100%. That means that after accounting for churn, this business is retaining and upselling its existing subscribers at a rapid rate. Year over year, as of the second quarter in 2021, quarterly revenue expanded by 75.9%. And the only thing that Doximity needs to do to keep growing is, well, exactly what it's been doing already.

Green flag No. 2: Strong financial execution thus far

The second green flag for investors is that Doximity's finances are in great shape. 

It has $742.66 million in cash, and a scant $616,000 in debt. That's plenty of dry powder that it could invest in growth via increasing its marketing efforts or by developing new features for its app. Likewise, its annual net profit margin of 36.45% is quite strong compared to the average software company's net margin of 30.66%. Its margin could go even higher over time if its service can keep squeezing more income out of its set of existing customers.

And investors should probably expect its hoard to keep growing. Since its initial public offering (IPO) in June of 2021, its quarterly net income has risen by 37.1%, which portends well for the future

Overall, these metrics indicate that management is doing a good job of shepherding the business. But there is still a pair of red flags that are worth knowing about if you're considering an investment.

Red flag No. 1: Powerful competitors 

The trouble with Doximity's business is that it's competing in the market for telehealth platforms even if telehealth is just one of its offerings. So it could face opposition from massive telehealth companies with name recognition, like Teladoc Health

But it's important to note that the company's business model treats physicians and primary care clinics as its target customers rather than employers, insurers, and (to a lesser extent) patients, like Teladoc does. At a minimum, that ensures that competition over customers is unlikely to be direct. Target customers for Doximity probably won't be poached if they see an advertisement for Teladoc, as Teladoc's service isn't intended for them. Plus, it isn't in the business of providing telehealth itself, like Teladoc is.

Still, the amount of indirect overlap is impossible to deny. If on average, consumers find that it's faster to get a telehealth appointment with Teladoc than from their primary care physician who uses Doximity, it'll be a headwind to customer retention, since physicians are unlikely to keep paying for a service that their patients don't use.

Red flag No. 2: Poor share performance

The other issue with Doximity is that the total return of its stock has fallen by more than 30% in the last six months. In contrast, the stock market is just about flat over the same period.

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Short-term results aren't a guarantee of how the stock will perform in the future, but they do suggest that the market isn't taking to the stock warmly in the current conditions. 

But the third-quarter earnings report should drop on Feb. 8. If the business can keep its customer acquisition costs low and its rate of recurring revenue high, it'll help to catalyze a rally when the report comes out. Of course, there's always the risk that growth slows down and exacerbates the situation, so investors should tread carefully if they're considering buying shares in the near future.