Doximity (DOCS -2.48%) was a popular, new healthcare stock that went public last year. The company, which many call the "LinkedIn for doctors," has focused on making it easier for physicians to connect with their patients and also improve overall workflows.
However, the stock hasn't been faring well thus far in 2022 -- it's down 10%. That's roughly in line with how the S&P 500 has been performing. And over the long term, it may prove to be just a bump in the road for what could be a top growth stock to own for many years.
Although investors have been selling the stock this year, there are three key reasons why you may want to remain bullish on it, especially if you're willing to hang on for the long haul.
The company has a great balance sheet
A key factor that growth investors sometimes overlook is the balance sheet. While soaring sales can be attention-grabbing, that's not necessarily indicative of the company's ability to grow over the long term (without diluting its investors). As of the end of 2021, Doximity reported $85.1 million in cash and cash equivalents. It also possessed $680.5 million in marketable securities, which are highly liquid. Doximity has no debt on its books. Its total liabilities of $93.3 million are made up almost exclusively of current liabilities totaling $91.7 million.
That puts Doximity in an excellent position to invest in its operations and expansion. And its financial position will likely only get stronger as the company has generated $79.6 million in cash from its day-to-day operating activities over the nine-month period ending Dec. 31 while spending less than $1 million on property and equipment purchases during that time. Most of the company's investing activities relate to the purchase and sale of marketable securities.
It generates high margins and strong profits
Growth investors should also focus on profit margins. And here too, Doximity has been reporting some impressive numbers. Over the past three quarters, it has generated revenue of $250 million. With cost of revenue at just $28 million, that means Doximity's gross margin is an incredible 89% of its top line. High-margin businesses are great for investors because that means a company has a significant amount of money to cover its overhead and other operating expenses.
With such a strong gross margin, it's no surprise that Doximity reported a profit of $118.1 million on all that revenue, for a net margin of 47%.
If Doximity can continue posting these types of strong results, this is a stock that can take off over the long haul, as roughly half of any incremental revenue will flow through to the bottom line and pad its profits.
Its retention rate is incredibly high
Doximity's sales for the last three months of 2021 totaled $97.9 million and were up 67% year over year. But perhaps more important was the company's net revenue retention rate. That's a key figure because it compares how much revenue customers generated over the trailing 12 months and compares it against the same period a year earlier. It shows whether customers are spending more with the business than they were a year earlier, and the higher the number is, the more likely they are satisfied with the service.
The results are incredibly encouraging with Doximity reporting that its net revenue rate was 171% in its most recent quarter. Although the company is anticipating a quarter-over-quarter drop in sales -- forecasting its top line to come in no higher than $90 million for the period ended March 31 -- the business is sound. Over the long term there will be more growth opportunities ahead, especially as hospitals recover from COVID-19 and resume their regular operating activities.
Is Doximity's stock a buy today?
The one thing that may be concerning to growth investors today is Doximity's valuation. At over 60 times its earnings, that's a steep multiple to pay at a time when investors appear to be shedding any and all types of growth stocks. The average healthcare stock in the Health Care Select Sector SPDR Fund trades at less than 23 times its profits. And it's even harder to justify such a premium given the expected drop in Doximity's sales in the first quarter.
However, if you're willing to stay the course with the stock, it could still pay off to invest in the company today. As its sales rise, so too will the bottom line, making the stock's high earnings multiple look a whole lot smaller in the future.