Shares of Doximity (DOCS 0.65%) soared in the months following their June 2021 initial public offering. But the stock's performance hasn't been as bright since, losing 38% since its launch. The reason: Some investors might have worried the stock had gained too much too fast.
Another concern is whether the company's revenue source can keep delivering -- or whether it will reach a peak and then stagnate. And more recently, investors have worried that today's high interest rates could weigh on demand for ads on Doximity, and therefore hurt revenue.
Does this mean we should avoid the stock? Or is Doximity a buy after reaching a very reasonable valuation? Let's find out.
The positives in Doximity's story
First, it's important to note all the positives for Doximity. And there are a lot of them.
Doximity is a platform that makes the job of doctors a whole lot easier. Through a free app, it offers them the opportunity to connect with colleagues, transfer patient files, conduct telehealth visits, read up on the latest discoveries in their specialty areas, and more.
And the platform continues to innovate to keep doctors coming back. For example, it's testing a DocsGPT writing tool to cut down on paperwork and streamline procedures. DocsGPT can help doctors with tasks such as quickly drafting letters to insurers regarding patient medication.
So it's no wonder that 80% of U.S. doctors use Doximity.
The company earns revenue through its advertising clients: pharmaceutical companies and hospital systems that aim to reach doctors. These clients include the top 20 pharmaceutical companies and the top 20 hospital systems. Even better, they have shown their loyalty. Doximity's net revenue retention rate among its top clients was 127% in the third quarter.
The third quarter is when clients generally sign up and commit to marketing budgets for the coming year. And this time around, Doximity delivered a record selling season, with eight pharma brands signing up to programs of $5 million or more. That's double last year's number.
All of this has resulted in continued earnings growth at Doximity.
DOCS net income (annual) data by YCharts.
A "high-cash generating business"
In the third quarter, free cash flow surged 85% year over year to $47.5 million -- a sign of the company's "very profitable and high-cash generating business," chief financial officer Anna Bryson said during the earnings call.
But could Doximity's growth have limits? It's true that it already has a solid portfolio of clients. This doesn't mean growth will peak and then drop off, though.
Today, Doximity works with more than half of the 415 pharmaceutical brands that generate more than $100 million in U.S. sales. But the platform's ads account for less than 5% of marketing budgets in the U.S. medical community. So there's plenty of room for growth. And as management creates new ways for these clients to connect with doctors, revenue should rise, too.
So far, Doximity hasn't seen a slowdown in advertising, but it's possible that could happen if today's economic woes persist.
Another potential headwind, which the company actually is facing now, are longer-than-expected medical legal review times. This involves certain videos and has delayed revenue from that content -- causing Doximity to lower its annual growth projection to 22% from the range of 23% to 26%. These problems are temporary, though, and don't change the company's bright prospects.
Now, let's look at valuation. The stock is trading at about 46 times forward earnings estimates. That's down from more than 75 a year ago. Today's level looks reasonable considering Doximity's earnings growth and solid portfolio of clients, making it a stock to buy now.
It's impossible to predict when Doximity's stock will take off. But the company has what it takes to continue growing earnings over time -- and that should lead the stock higher, too.
