Shares of Doximity (DOCS -2.73%) dipped more than 10% the morning after it reported results from its fiscal third quarter that ended on Dec. 31, 2022. The company revised its forward-looking guidance downward, and the market made a knee-jerk reaction.
Nobody likes to hear the companies they've invested in say they were too optimistic about the future. Luckily, Doximity had plenty of encouraging news to share as well. Just read on to see why this stock is a smart buy right now despite its guidance revision.
Why Doxmity's stock price fell
The company outperformed Wall Street's expectations during its fiscal third quarter, but management also told investors it would miss the fiscal 2023 revenue estimate it shared just a few months ago.
Now, total revenue for the fiscal year ending on March 31 is expected to land in a range between $417.7 million and $418.7 million. This is roughly 2% below the midpoint of guidance provided last November.
Doximity's guidance revision might make it seem like this fast-growing business is decelerating, but this isn't necessarily the case. During the earnings call with analysts, management explained that a transition from horizontal to vertical videos was holding up the release of new peer-to-peer and point-of-care modules. The important takeaway for investors is that this is revenue that will be delayed but not lost.
Why I'd buy Doximity again on the dip
If Doximity were still losing money, any sign of a slowdown might justify some losses. Fortunately, it's strongly profitable and becoming more so. Operations generated $128 million in free cash flow during the nine months that ended Dec. 31, 2022. That's 68% more than the company reported a year earlier.
Shares of Doximity are trading at a steep multiple of 36.8 times trailing free cash flow. After another outstanding quarterly performance, though, I'm convinced the company can grow into its valuation and deliver market-beating gains over the long run.
More than 80% of U.S. physicians are on Doximity's social media platform. Member feeds allow comments, but physicians can't post their own content in an attempt to go viral. This is an ideal situation for advertisers, as evidenced by its client roster. The top 20 pharma companies and top 20 hospital systems have contracts with Doximity.
The last three months of 2022 were tough on the advertising industry. Alphabet recently reported Google advertising revenue that sank 3.6% year over year. Despite a difficult period for digital advertisers, Doximity's reported a 127% revenue retention rate among its 20 largest clients.
There's still plenty of room for Doximity to grow ad sales. The company estimates it's captured less than 5% of total advertising budgets aimed at U.S. medical professionals.
In addition to digital ads, Doximity makes money selling enterprise-level access to a growing suite of increasingly popular productivity tools. Active members using the company's productivity tools reached another all-time high during the last three months of 2022, with help from 375,000 unique users who logged in to use the company's telehealth offerings.
Managing on-call schedules and telehealth are big growth drivers at the moment but could be overshadowed by a program currently in beta testing. Recently, the company began integrating the popular artificial intelligence writing assistant ChatGPT into its suite of productivity tools. It's early, but doctors do so much paperwork that DocsGPT could be a game changer that keeps enterprise clients coming back for more.
Doximity's near-term guidance revision is disappointing but will hardly register on a longer timeline. With strong profits from growing sales of productivity tools and digital ads, this stock is a screaming buy on the dip.
