What happened
Shares of telemedicine stock Doximity (DOCS) dropped 15% last month due to market forces that weighed down on growth stocks. There wasn't any major news on the company, but the stock couldn't fight the tide that resulted in very similar charts for its telehealth peers.
So what
Doximity had a huge February after delivering a great quarterly earnings report. Investor risk appetite declined in early March due to geopolitical fallout from the war in Ukraine, paired with anticipation of drastic rate hikes from the Federal Reserve in response to high inflation.
Doximity is a tech platform for physicians that helps them work much more efficiently. It allows them to communicate directly with patients, collaborate with colleagues, review research, and manage patient data in compliance with regulations. It has tremendous market acceptance, with nearly 80% of doctors and 50% of nurse practitioners and physician's assistants as verified members on the Doximity platform.
Image source: Getty Images.
In its most recent quarter, the company reported 67% revenue growth over the prior year, which is a huge number. It also achieved net revenue retention of 171%, which indicates that it's not only keeping its users, but that members are interacting much more deeply with the platform than they did one year ago. In the software-as-a-service world, net revenue retention of 120% is often considered strong, so that number from Doximity is spectacular. The company is also delivering wonderful profit growth, as efficiencies of scale and operating leverage drive margin improvement.
The biggest knock on Doximity is its valuation. The stock trades at a forward P/E ratio above 100, and a price-to-sales ratio above 30. Its peak price-to-sales ratio was over 60, so this is definitely one of those pandemic growth stocks that got investors carried away. It's still undergoing the long process of price rationalization from unsustainable valuation levels, and its price chart reveals high correlation with other stocks that were in the same boat.
DOCS, TDOC, YI Total Return Level data by YCharts
That's just something that investors will have to accept -- this stock can move sharply downward, even if the company doesn't do anything wrong.
Now what
Despite falling from their high, Doximity shares still have the aggressive valuation that we've come to expect from such a promising growth stock. Its network effect and strong brand among doctors is a key component to building an economic moat, which is good for long-term success. The company hopes to become the go-to platform for all physician professional activities. If it can expand in the verticals of job search and pharmaceutical marketing and communications, then there's an enormous opportunity ahead.
Doximity is reaching full saturation in the U.S. market, so it will have to unlock new monetization opportunities in international markets if it wants to justify its lofty valuation. If it's able to hold off competition and deliver on those goals, then there's enormous upside for investors. Don't be shocked if the stock remains volatile over the next few months as the market continues to grapple with rising interest rates and the threat of a recession induced by rate hikes.