Healthcare stocks have been some of the worst-performing equities over the prior 12 months. And medically oriented companies with growth-dependent valuations have been particularly hard hit by this moody market.
Doximity (DOCS 0.19%), which owns and operates the largest digital platform for U.S. medical professionals, is a prime example. The company's stock price is presently down by an eye-catching 60.9% relative to its all-time highs.
Should bargain hunters pounce on this downtrodden growth stock, or is it better to watch this falling knife from the sidelines? What follows is the bull versus bear view on the company's near-term prospects.
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A wide economic moat
George Budwell: Doximity definitely qualifies as a high-valuation healthcare stock that has been roughed up by this moody market. Shares of this healthcare-oriented information technology company are presently down by over 37% since their last forward stock split in the middle of 2021. As a result, Doximity's valuation has shrunk from 78 times forward-looking earnings at their peak to a far more modest 39.9 times forward-looking earnings at present. The long and short of it is that investors were expecting Doximity's top line to explode higher in response to the large commercial opportunity inherent in its core markets.
NYSE: DOCS
Key Data Points
While Doximity's annual revenue, net revenue, and free cash flows have indeed grown immensely over the past few years, Wall Street's short-term growth expectations for the company were clearly unrealistic. Consequently, the stock's reversion to the mean this year isn't exactly without cause. That being said, Doximity's shares now appear to be in bargain territory following this prolonged pullback.
What makes Doximity stock a contrarian buy right now? Two interrelated issues. First of all, Doximity's membership currently covers a whopping 80% of physicians across all 50 states and every medical specialty. With this entrenched position in the market, its digital healthcare platform sports a key advantage over potential competitors.
Second, Doximity's platform is targeting a nearly $19 billion commercial opportunity. The company has yet to even scratch the surface of this enormous market. Doximity's stock is presently trading at a price-to-sales ratio of a little over 1, assuming a meager 33% penetration rate across its core markets.
All told, the market has arguably gone overboard with its dire take on this top growth stock. Bargain hunters, in turn, may want to start to nibble on this undervalued name.
Good idea, terrible valuation
Patrick Bafuma: At first glance, there seems to be a lot to like about the healthcare version of LinkedIn. And Doximity does have some impressive credentials, including a CEO who found success back in the PalmPilot days. Doximity CEO and co-founder Jeff Tangney is the former president and chief operating officer of Epocrates, arguably the original medical app for smartphones, reaching a user base of over a million users worldwide. Furthermore, the top 20 hospitals and top 20 pharmas utilize Doximity tools. So why am I bearish on the stock? I can't get past my own personal experiences with the website, nor its valuation.
I work in healthcare and don't mind browsing the periodic medical-related updates via email from the company. However, while its newsfeed both on the website and the app are well laid out and manageable, it is somewhat overgeneralized -- especially when I can obtain more high-yield, specialty-focused information from other apps, podcasts, and email subscriptions. And while the company touts that over 80% of U.S. physicians signed up, I can't say I really know anyone who regularly uses it.
Currently, the level of interaction with both peers and worldwide thought leaders is much higher on Facebook, Twitter, and Reddit; it's just not there on Doximity yet. And I know fewer clinicians, if any, who use it as a professional network. I receive plenty of emails from recruiters via LinkedIn or Indeed; I have not yet gotten any from Doximity.
While recruitment and increased colleague interaction may represent future avenues for growth, it's clear that the current pathway to growth is eroding. The slowdown is happening rather quickly -- the company cut guidance for the fiscal year from between $454 million and $458 million, to between $424 million and $432 million. The bottom end of this revised forecast represents a 24% jump in annual revenue, which would be a substantial drop from the 66% annual revenue growth rate over the prior fiscal year.
This softer guidance also seems to reflect the number of new customers responsible for $100,000 or more in revenue during the prior quarter. These "big fish" customers were only up 22% in the first quarter of fiscal year 2023. Compare that to the same period the year prior, when customers with orders of $100,000 or greater were up 58% year over year.
While the company is profitable and growing, it has a lofty valuation at just under 15 times price to fiscal-year 2023 sales. So, with slowing growth, downward guidance, a lofty valuation, and an app that I just don't see as a "must-have" for clinicians, I'll skip Doximity for now.
