Healthcare networking platform Doximity (DOCS 0.97%) went public in late 2021. The stock nearly doubled just months later, but has since cooled off in this bear market. The stock is down 68% from its high, more than giving back those quick post-IPO gains. Is the stock destined to rebound or was it just another bad investment that a euphoric Wall Street propped up in 2021?
Doximity allows healthcare professionals to network, educate themselves, and communicate with patients, providing clarity in a notoriously complex industry. But there are some question marks about the stock's long-term investment potential. Consider these key observations before deciding whether Doximity belongs in your portfolio.
Tapping out customer growth
Doximity calls itself "the digital platform for doctors." It's free for physicians to join. Doximity generates revenue on subscriptions it charges to pharmaceutical and healthcare system companies that pay to advertise or access the user base for hiring.
Being highly specialized can be a double-edged sword. On the one hand, Doximity has traction with its target market; the company estimates that 80% of physicians in the U.S. are on Doximity.
But on the other hand, growth can suffer as you saturate your target market. Doximity came public with roughly 600 subscription customers, most of them paying for marketing services. You can see below how much revenue growth has slowed since Doximity's been public. Understandably, revenue growth will slow if your advertising partners are starting to max out their spending on the platform.
DOCS Revenue (Quarterly YoY Growth) data by YCharts
Doximity proclaims that it serves all of the U.S.'s top 20 pharmaceutical companies and hospitals. That underscores the value the platform creates, but the company must monetize its customers and network members in new ways. Otherwise, revenue growth could continue stagnating. Analysts seem to believe Doximity's growth is stalling; estimates call for earnings-per-share (EPS) growth averaging just 4% over the next three to five years.
Trading at a growth stock's valuation
The stock's most significant problem could be that investor expectations don't align with the potential reality of Doximity's forward-looking performance. The stock trades at a forward price-to-earnings ratio (P/E) of 48, almost triple that of the S&P 500, averaging nearly 10% growth over its lifetime. Doximity is hardly a growth stock if those projections for 4% earnings growth prove accurate, and one could expect the stock's valuation to decline as a result.
DOCS PE Ratio (Forward) data by YCharts
The current gulf between Doximity's valuation and expected growth (or lack thereof) should give investors pause before buying the stock. This would change if Doximity can show uptrends in new revenue streams, but I've always argued that investors should be especially picky in bear markets when there are declining share prices across the board. But until then, Doximity looks too expensive to justify putting new money into the stock.
