What happened
Telehealth stock Doximity (DOCS 1.78%) tumbled 21.6% in August, according to data provided by S&P Global Market Intelligence, following weak earnings guidance. Things only got worse as investors pulled out of growth stocks with high valuations. Commentary from the Federal Reserve made it seem likely that interest rates will continue to climb, which reduced investor risk appetite.
So what
Doximity grew 25% last quarter and beat Wall Street's forecasts, but investors couldn't overlook the company cutting its guidance. Its full-year revenue expectations are now $25 million to $30 million lower, which implies a meaningful slowdown in the second half of the year. Doximity's CEO attributed this revision to the company's difficulty upselling in the pharmaceutical industry, which is under macroeconomic pressure.
Doximity is a networking platform for healthcare professionals, and its product suite has expanded to include other tools including patient communications, document transfer, and scheduling. More than 80% of physicians in the U.S. are network members, so the company's successfully developed traction in its target market.
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Despite all of that, Doximity is still a growth stock with an expensive valuation. Any negative news that casts doubt on its future growth is likely to generate sharp losses. That's especially true during periods of stock market volatility, such as the one we're experiencing now. Rising interest rates and the threat of economic contraction are causing investors to pull money out of the stock market. That disproportionately impacts riskier stocks.
Now what
There's plenty to like about Doximity, but last month was a clear demonstration of how this story can go sideways. The stock's price-to-sales ratio was above 25 prior to the earnings report, which is high. It always had the risk of dropping steeply following bad news, and that's exactly what happened.
Beyond simply slowing down, the recent guidance revision hints at a challenge that Doximity will have to overcome in order to justify its valuation. Getting 80% of physicians in the country to sign up is an incredible feat, and Doximity's member network is very valuable. The flip side of that is market saturation -- it's already penetrated most of its target market domestically, so growth can be more difficult to sustain. It will have to expand internationally and successfully roll out new products to monetize its users in the future.
None of this is a mystery to Doximity's leadership, and it is developing a strategy to address these issues. It has a meaningful economic moat due to its membership, but there's risk associated with capitalizing on it more deeply. If investors are bullish about the stock's long-term potential, then they have to accept the potential for inflation in the short and medium terms.
