What happened
Shares of Doximity (DOCS -1.47%) shot 28.4% higher last month after it reported quarterly earnings. The telehealth company's revenue grew 29% year over year, beating Wall Street's estimates for both sales and profits. It also provided positive forward-looking commentary on its advertising business.
So what
Growth is necessary for Doximity's investment narrative, so shareholders were happy to see that 29% expansion. While the headlines indicate that net profit decreased relative to last year, a closer look reveals a more bullish picture. The company's EBITDA rose 40%, and free cash flow more than doubled. While net income is an important and valid measurement of profits, these alternative metrics show that the amount of cash actually flowing to the business outpaced revenue growth.
Importantly, Doximity's commentary indicated that the company is likely to meet its full-year financial projections. Investors had begun to worry that soft economic conditions would prevent the company from meeting its financial goals. Many digital advertising businesses are struggling with challenges posed by inflation and slowing macroeconomic growth, which led to concerns about Doximity's advertising revenue. The telehealth platform offers valuable ad space to pharmaceutical companies and other businesses that market to doctors. That doesn't seem to be a major concern at the moment, which created serious momentum for Doximity stock.
Image source: Getty Images.
Doximity also announced an expanded share repurchase plan, which could be as much as half of its current free-cash-flow run rate. That indicates that the company is confident in its future cash flows, and it also suggests that Doximity's board of directors thinks that the stock's valuation is low. Both are fairly bullish signals.
However, this also signals that the company sees somewhat limited opportunities to deploy capital for growth. If it were able to accelerate expansion through marketing or hiring, it's unlikely that it would spend cash on share repurchasing. Growth isn't necessarily an issue for Doximity right now, but this is something to consider.
Now what
Doximity stock is down more than 40% over the past 12 months. Its forward P/E ratio is still nearly 60, which is fairly expensive. The stock's bulls will point out that its PEG ratio is only 2 due to the 30% growth rate, but it's still hard to argue that Doximity is cheap. Strong future performance is already reflected in the current price.
That sort of valuation shouldn't be prohibitive for long-term growth investors. If the company continues to expand at this clip and produce strong cash flow, then it will likely appreciate substantially. Profitable expansion also goes a long way toward reducing risk for investors -- this would be a totally different story if Doximity were burning cash.
Still, there are concerns about ongoing economic obstacles in the short term, and the stock's valuation can lead to high volatility. Doximity is also close to market saturation, with around 80% of doctors and 50% of nurse practitioners and physician's assistants already on the platform. That still leaves some space to expand, but the telehealth platform will have to unlock new revenue streams from its existing user base to maintain its high growth rate.
